heinterest ateo de se alt the eal isk-free a ep san flation a default risk premium plus a liquidity premium plus a maturity risk premium. emiumplusad fault iskpremiumplusa uidit premi molusamaturity k rem un. Tenterest teondebt, salsotu tothe Se iskree te s he real risk-free rate of interest may be thought of as the interest rate on Select U.S.Treasury securities in an infation-free world. A Treesury Inflation Protected Security (TIPS) is free of most risks, and its value increases with infation.Short term TIPS are free of cefault, maturity,and liquidity risks and of risk due to changes in the general level of interest rates. However, they are not free of changes in the real rate. Our definition of the risk free rate assumes that, despite the recent downgrade, Treasury securities have no meaningful default risk he inflation premium is equal to the average expected inflation rate over the life of the security Default means that a borrower willnot make scheduled interest or principal payments, andit afects the market interest rate on a bond. The Select4 the bond's risk of cefault, the higher the market rate. The average default risk premium varies over time andi tends to get Selectwhen the economy is weaker and borrowers are more likely to have a hard time paying off heir debts A liquid asset can be converted to cash quickly at a fair market value.'Real assets are generally Selectliquid than financial assets, but different financial assets vary in their liquidity. Assets with higher trading volume are generally Selectliquid. The average liquidity premium varies over time of nsk ca ed e ec ; ate bils are heavily exposed to -Select- k There ore, a e ect # k n i est g The nces o long-term bonds -Se ect # whenever terest a es se. Because interest ates can and do occasional se, all ong-term bonds, even Treasury bonds, have an e en pre um, which s higher the lon er the term o ne bond s ndded in the eared interest ate. While lo -term bonds are heavily exposed to Select # rate k hort-ter rtermTl esrves one'Selechtrs incme provided by short-termTb s Selec- stable than the nterest income on long term bonds Quantitative Problem: k. A ho An ana st evaluating securities has obtained the f o ing fo ation. The ea ate of interest s 24% and s expected to e an constant for te next 5 years. nfla is expected to be 22% next year, 3.2% he f low ng year, 4.2% ne d year, and 52% every year thereafter. The matur y nsk premium estimated o be 1 x t 1 % here t-n be years to maturity. The ty p en on elevant 5 year sec es 5% and the default sk premium on elevant 5 year sec ties s l 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 What is the yield on a 5-year corporate bond? Round your intermediate calculations and final answer to two decimal laces. heinterest ateo de se alt the eal isk-free a ep san flation a default risk premium plus a liquidity premium plus a maturity risk premium. emiumplusad fault iskpremiumplusa uidit premi molusamaturity k rem un. Tenterest teondebt, salsotu tothe Se iskree te s he real risk-free rate of interest may be thought of as the interest rate on Select U.S.Treasury securities in an infation-free world. A Treesury Inflation Protected Security (TIPS) is free of most risks, and its value increases with infation.Short term TIPS are free of cefault, maturity,and liquidity risks and of risk due to changes in the general level of interest rates. However, they are not free of changes in the real rate. Our definition of the risk free rate assumes that, despite the recent downgrade, Treasury securities have no meaningful default risk he inflation premium is equal to the average expected inflation rate over the life of the security Default means that a borrower willnot make scheduled interest or principal payments, andit afects the market interest rate on a bond. The Select4 the bond's risk of cefault, the higher the market rate. The average default risk premium varies over time andi tends to get Selectwhen the economy is weaker and borrowers are more likely to have a hard time paying off heir debts A liquid asset can be converted to cash quickly at a fair market value.'Real assets are generally Selectliquid than financial assets, but different financial assets vary in their liquidity. Assets with higher trading volume are generally Selectliquid. The average liquidity premium varies over time of nsk ca ed e ec ; ate bils are heavily exposed to -Select- k There ore, a e ect # k n i est g The nces o long-term bonds -Se ect # whenever terest a es se. Because interest ates can and do occasional se, all ong-term bonds, even Treasury bonds, have an e en pre um, which s higher the lon er the term o ne bond s ndded in the eared interest ate. While lo -term bonds are heavily exposed to Select # rate k hort-ter rtermTl esrves one'Selechtrs incme provided by short-termTb s Selec- stable than the nterest income on long term bonds Quantitative Problem: k. A ho An ana st evaluating securities has obtained the f o ing fo ation. The ea ate of interest s 24% and s expected to e an constant for te next 5 years. nfla is expected to be 22% next year, 3.2% he f low ng year, 4.2% ne d year, and 52% every year thereafter. The matur y nsk premium estimated o be 1 x t 1 % here t-n be years to maturity. The ty p en on elevant 5 year sec es 5% and the default sk premium on elevant 5 year sec ties s l 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 What is the yield on a 5-year corporate bond? Round your intermediate calculations and final answer to two decimal laces