a. Plot a yield curve using interest rates for government default risk-free securities.

b. Plot a yield curve using corporate debt securities with low default risk (high quality) and a separate yield curve for low-quality corporate debt securities.

c. Measure the amount of default risk premiums, assuming constant inflation rate expectations and no maturity or liquidity risk premiums on any of the debt securities for both high-quality and low-quality corporate securities based on information from (a) and (b). Describe and discuss why differences might exist between high-quality and low-quality corporate debt securities.

d. Identify the average expected inflation rate at each maturity level in (a) if the real rate is expected to average 2 percent per year and if there are no maturity risk premiums expected on Treasury securities.

e. Using information from (d), calculate the average annual expected inflation rate over years 2 through 5. Also calculate the average annual expected inflation rates for years 6 through 10 and for years 11 through 20.

f. Based on the information from (e), reestimate the maturity risk premiums for high-quality and low-quality corporate debt securities. Describe what seems to be occurring over time and between differences in default risks

Maturity or Term Rate 1 year 4.0% 1 year 5.0% 3.5% 5.0% 1 year 5 years 5 years 5 years 10 years 6.5% 8.0% Type of Security Corporate loan (high quality) Corporate loan (low quality) Treasury bill Treasury note Corporate bond (high quality) Corporate bond (low quality) Corporate bond (low quality) Corporate bond (high quality) Treasury bond Treasury bond Corporate bond (high quality) Corporate bond (low quality) 10.5% 10 years 8.5% 7.0% 10 years 7.5% 20 years 20 years 9.5% 20 years 12.0%