Martina Navola is a successful TV actress and you are her financial manager. Lately, she is intending to invest in some fixed-income securities. Her dilemma is about different levels of interest rates as what factors determine those levels? She is asking you to respond to the following details:

1. What are the most essential factors that differentiate the level of interest rates in an economy?
2. How risk-free real return is different than nominal risk-free return and how these two rates can be measured?
3. What do the business magazines mean by the following terms:
   1. Inflation Premium
   2. Default Risk Premium
   3. Liquidity Premium
   4. Maturity Risk Premium (MRP).
4. Which of the above premiums determine the return on:
   1. short-term government bonds
   2. long-term government bonds
   3. short-term corporate securities
   4. long-term corporate securities
5. How do the time-based term effects interest rates and its yield curve?
6. Assume that market expects the Inflation rate to be 3% next two years, 6% in a later year, and 7% thereafter. The risk-free rate is 2% whereas the maturity risk is zero for bonds with maturity in 1 year or less and 0.2% for more than 1-year bonds and then this MRP increases by 0.1% every year thereafter till 15 years. What should be the return on bonds with a maturity of 1 year, 10 years, and 15 years bonds? Draw and explain why the constructed yield curve is upward-sloping?
7. Is there any circumstance where the yield curve of AAA-rated corporate bonds can be similar to government bonds? Draw the graph to prove your point.