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A. The real risk-free rate of interest, r*, is 3%; and it is expected to remain constant over time. Inflation is expected to be 3%
A. The real risk-free rate of interest, r*, is 3%; and it is expected to remain constant over time. Inflation is expected to be 3% per year for the next 3 years and 4% per year for the next 5 years. The maturity risk premium is equal to 0.1 x (-1)%, where t-the bond's maturity. The default risk premium for a BBB- rated bond is 1.3%. 1. 2. 3. 4. 5. 6. What is the average expected inflation rate over the next 4 years? What is the yield on a 4-year Treasury bond? What is the yield on a 4-year BBB-rated corporate bond with a liquidity premium of 0.4%? What is the yield on an 8-year Treasury bond? What is the yield on an 8-year BBB-rated corporate bond with a liquidity premium of 0.4%? If the yield on a 9-year Treasury bond is 7.3%, what does that imply about expected inflation in 9 years
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