1. Determinants of Interest Rate for Individual Securities A Corporation's 20-year bonds have an equilibrium rate of return is 7.00 percent. For all securities, the inflation risk premium is 1.53 percent and the real interest rate is 3.28 percent. The security's liquidity risk premium is .33 percent and the maturity risk premium is .78 percent. The security has no special covenants. What is the bond's default risk premium?
2. Suppose that the current year- rate (1-year spot rate) and expected 1-year T-bill rates over the following three years (i.e. years 2,3 and 4, respectively) are as follows Using the unbiased expectations theory, calculate the current (long-term) rates for one-, two-, three- and four-year-maturity Treasury securities.