MORTON HANDLEY & COMPANY 6-21 INTEREST RATE DETERMINATION Maria Juarez is a professional tennis player, and your firm man- ages her money. She has asked you to give her information about what determines the level of various interest rates. Your boss has prepared some questions for you to consider. TAlhati e Suppose most investors expect the inflation rate to be 5% next year, 6% the following year, and 8% thereafter. The real risk-free rate is 3%. The maturity risk premium is zero for bonds that mature in 1 year or less and 0.1% for 2-year bonds, then the MRP increases by 0.1% per year thereafter for 20 years, after which it is stable. What is the interest rate on 1-, 10-, and 20-year Treasury bonds? Draw a yield curve with these data. What factors can explain why this constructed yield curve is upward sloping? f. At any given time, how would the yield curve facing a AAA-rated company comman with the