a$.$ Suppose you are considering two possible investment opportunities: a $12-$year Treasury bond and a $7-$year, A$-$rated corporate bond. The current real risk$-$free rate is $4\%,$ and inflation is expected to be $2\%$ for the next $2$ years, $3\%$ for the following $4$ years, and $4\%$ thereafter. The maturity risk premium is estimated by this formula: MRP $=0\mathrm{.}01($t $-1)\%.$ The liquidity premium $($LP$)$ for the corporate bond is estimated to be $0\mathrm{.}3\%.$ You may determine the default risk premium $($DRP$),$ given the company's bond rating, from the following table. Remember to subtract the bond's LP from the corporate spread given in the table to arrive at the bond's DRP$.$

Corporate Bond Yield

Rate Spread $=$ DRP $+$ LP

U$.$S$.$ Treasury $0\mathrm{.}73\%$

AAA corporate $0\mathrm{.}830\mathrm{.}10\%$

AA corporate $1\mathrm{.}250\mathrm{.}52$

A corporate $1\mathrm{.}690\mathrm{.}96$

b$.$ What yield would you predict for each of these two investments? Round your answers to three decimal places.

c$.12-$year Treasury yield:

d$.7-$year Corporate yield:

e$.$ Based on the information about the corporate bond provided in part b$,$ calculate yields and then construct a new yield curve graph that shows both the Treasury and the corporate bonds. Round your answers to two decimal places.

Years Treasury yield A$-$corporate yield

$15\mathrm{.}27\%$ fill in the blank $10\%$

$25\mathrm{.}37\%$ fill in the blank $11\%$

$35\mathrm{.}51\%$ fill in the blank $12\%$

$45\mathrm{.}55\%$ fill in the blank $13\%$

$55\mathrm{.}50\%$ fill in the blank $14\%$

$105\mathrm{.}59\%$ fill in the blank $15\%$

$206\mathrm{.}22\%$ fill in the blank $16\%$

$305\mathrm{.}80\%$ fill in the blank $17\%$

Using the Treasury yield information in part c$,$ calculate the following rates using geometric averages $($round your answers to three decimal places$)$:

$1.$ The $1-$year rate, $1$ year from now

fill in the blank $21\%$

$2.$ The $5-$year rate, $5$ years from now

fill in the blank $22\%$

$3.$ The $10-$year rate, $10$ years from now

fill in the blank $23\%$

$4.$ The $10-$year rate, $20$ years from now

fill in the blank $24\%$b$.$ Suppose you are considering two possible investment opportunities: a $12-$year Treasury bond and a $7-$year, A$-$rated corporate bond. The current real risk$-$free rate is $4\%,$

and inflation is expected to be $2\%$ for the next $2$ years, $3\%$ for the following $4$ years, and $4\%$ thereafter. The maturity risk premium is estimated by this formula: MRP $=$

$0\mathrm{.}01(t-1)\%.$ The liquidity premium $($LP$)$ for the corporate bond is estimated to be $0\mathrm{.}3\%.$ You may determine the default risk premium $($DRP$),$ given the company's bond

rating, from the following table. Remember to subtract the bond's LP from the corporate spread given in the table to arrive at the bond's DRP$.$

Corporate Bond Yield

What yield would you predict for each of these two investments? Round your answers to three decimal places.

$12-$year Treasury yield:

$\%$

$7-$year Corporate yield:

$\%$f$.$ Using the Treasury yield information in part $c,$ calculate the following rates using geometric averages $($round your answers to three decimal places$)$:

The $1-$year rate, $1$ year from now

$\%$

The $5-$year rate, $5$ years from now

$\%$

The $10-$year rate, $10$ years from now

$\%$

The $10-$year rate, $20$ years from now

$\%$d$.$ Based on the information about the corporate bond provided in part b$,$ calculate yields and then construct a new yield curve graph that shows both the Treasury and the

corporate bonds. Round your answers to two decimal places.