Question
An analyst evaluating securities has obtained the following information. The real rate of interest is 3% and is expected to remain constant for the next
An analyst evaluating securities has obtained the following information. The real rate of interest is 3% and is expected to remain constant for the next 5 years. Inflation is expected to be 2% next year, 3% the following year, 4% the third year, and 5% every year thereafter. The maturity risk premium is estimated to be 0.1 (t 1)%, where t = number of years to maturity. The liquidity premium on relevant 5-year securities is 0.5% and the default risk premium on relevant 5-year securities is 1%.
a. What is the yield on a 1-year T-bill? Round your intermediate calculations and final answer to two decimal places. %
b. What is the yield on a 5-year T-bond? Round your intermediate calculations and final answer to two decimal places. %
c. What is the yield on a 5-year corporate bond? Round your intermediate calculations and final answer to two decimal places. %
Please only answer if you are really confident in your knowledge of this topic. I've been so stuck on this and can't get this wrong again. Thank you so much for helping, you guys are really awesome life savers.
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