Part II: According to the textbooks discussion, the Fisher Equation can be expressed as Nominal Interest Rate Real Rate + Expected Inflation. The textbook further explains that the nominal interest rate on any financial instrument is a function of not only the real rate and expected future inflation, but also interest rate risk, default risk, taxability, and the lack of liquidity. Using again the Federal Reserves historical data on interest rates at http://www.federalreserve.gov/releases/h15/data.htm, find the following rates recorded for the latest month?

Federal Funds .55

4-Week Treasury bills .43

6-Month Treasury bills .61

10-Year Treasury bonds 2.45

20-Year Treasury bonds 2.79

30-Year Treasury bonds 3.06

Moodys seasoned

Corporate Bonds

Aaa 3.50

Baa 4.31

Provide in the space below an explanation for the determination of the latest monthly rate on Moodys seasoned corporate bonds rated Baa based on the above rates and the factors that determine nominal interest rates.