Current 30-day T-bills are yielding 3.5 percent. Your accountant provided you with these interest rate premiums:

• IP = 1.5%
• LP = 0.6%
• MRP = 1.8%
• DFP = 2.15%

What is the real risk-free rate of return based on this data?

Problem 2: Expected Interest Rate

For this problem, examine Treasury securities. Considering the following numbers, what would the yield on 3-year Treasury securities be?

• Real risk-free = 4%.
• Inflation is expected at 1.5% for this year and 2% for the next 2 years.
• Maturity risk premium = 0.

Problem 3: Default Risk Premium

A Treasury bond maturing in 5 years has a yield of 4 percent. A 5-year corporate bond has a yield of 7 percent. Consider that the liquidity premium on the corporate bond is 0.5 percent. If this is so, what is the default risk on the corporate bond?