Mr. Brown is looking to invest in an AA-rated corporate bond. But, first he wants to calculate the various risk components of the bond, but he doesnt know how and has asked you for help. He compiled the following information for you in the table below. Mr. Brown already knows that the liquidity premium is 8 basis points.

3-month T-bills 2.0%

30-year Treasury bonds 5.0%

AA-rated corp. bonds 8.0%

Inflation Rate 1.0%

1) Please estimate for Mr. Brown the nominal rate for an AA-rated corporate bond. Please provide Mr. Brown with, as part of your answer, the inflation risk premium, the default risk premium, the maturity premium, and the liquidity premium.

2) Mr. Brown is also looking at returns in the treasury market. He knows that the current rate of return on a one-year U.S. Government security is 3%. And, he has looked up the rate of return on a two-year U.S. Government security, which is 5%. According to the expectations theory, can you please calculate for Mr. Brown the return on a one-year U.S. Government security purchased one year from today?