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Please answer the following questions with elaborate explanation: Assume that market expects the Inflation rate to be 3% next two years, 6% later year and

Please answer the following questions with elaborate explanation:

  1. Assume that market expects the Inflation rate to be 3% next two years, 6% 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 maturity of 1 year, 10 years and 15 years bonds? Draw and explain why the constructed yield curve is upward-sloping?
  2. 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.

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