helpYou are looking at some corporate bonds issued by Poton Berhad, and you are trying to determine what

the nominal interest rate should be on them.

You have determined that the real risk$-$free rate is $3\mathrm{.}5\%,$ and this rate is expected to remain constant into

the future. The maturity risk premiums $($MRP$)$ increase from zero for bonds that mature in one year or less

to a maximum of $1\%$; also the MRP is equals to $0\mathrm{.}2\%$ for two$-$year bond and increases by $0\mathrm{.}2\%$ each year.

Following are the expected inflation rates for the next five years:

From the above information you are required to answer the following questions:

a$.$ Compute the nominal interest rate for a one, two, three, four, and five$-$year bond issued by Poton

Berhad.

$(8$ marks$)$

b$.$ If inflation rate is expected to be equal $8\%$ every year after $2023,$ what should be the interest rate for

a $10-$ and $20-$year bond?

$(3$ marks$)$

c$.$ Plot the yield curve for the interest rates you computed in part $[$a$]$ and $[$b$].$

$(2$ mark$)$

d$.$ Based on the curve $($in part c$),$ what would you do if you are the lender? Are going to lend more? Or

less? Explain your answer.

$(2$ marks$)$