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Assume that the real interest rate is 2%, the default risk premium is 3%, the liquidity premium is 1%, and the maturity risk premium is
Assume that the real interest rate is 2%, the default risk premium is 3%, the liquidity premium is 1%, and the maturity risk premium is 1% per year. Additionally, the expected inflation rate is 3% next year, 1% the year after, and 10% from then on. What are the nominal interest rates for: a) (5 pts) 1-year note? b) (5 pts) 5-year bond? c) (5 pts) Does this produce an inverted yield curve? Why or why not?
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