Question
An analyst evaluating securities has obtained the following information. The real rate of interest is 2% and is expected to remain constant for the next
An analyst evaluating securities has obtained the following information. The real rate of interest is 2% and is expected to remain constant for the next 3 years. Inflation is expected to be 3% next year, 3.5% the following year, and 4% the third year. The maturity risk premium is estimated to be 0.1 (t 1)%, where t=number of years to maturity. The liquidity premium on relevant 2-year securities is 0.25% and the default risk premium on relevant 2-year securities is 0.6%.
a) What is the yield on a 1-year T-bill? b) What is the yield on a 2-year T-bill? c) What is the yield on a 2-year corporate bond?
Please provide step by step solutions and explanation, thanks.
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