1. Assume that we have only five different investment alternative. These alternatives are given below. There are only two two-year, two eight-year maturity and one seven year maturity investments. The table also provides the maturity, liquidity, and default risk characteristics of a new investment possibility (Investment 3 / 7 years to maturity). All investment alternatives are zero coupon bonds with a single face value payment at the maturity. Assume that inflation premium, liquidity premium, and default risk premium are constant across all time horizons.

Investment	Maturity (in Years)	Liquidity	Default Risk	Interest Rate (%)
1	2	High	Low	2.0
2	2	Low	Low	2.5
3	7	Low	Low	12.810
4	8	High	Low	4.0
5	8	Low	High	6.5

Based on the information in the above table:

1. Explain the difference between the interest rates on Investment 1 and Investment 2.
2. Estimate the default risk premium.
3. Calculate upper and lower limits for the interest rate on Investment 3, 12.810%