Please I need help with theSpreadsheet Problem attach.

4/2/2003 Chapter 1. Ch 01 P08 Build a Model a. Suppose you are considering two possible investment opportunities, a 12-year Treasury bond and a 7-year, A-rated corporate bond. The current real risk-free rate is 4%. Inflation is expected to be 2% for the next two years, 3% for the following four years, and 4% thereafter. The maturity risk premium is estimated by this formula:MRP = 0.1% ( t-1) %. The liquidity premium for the corporate bond is estimated to be 0.7%. Finally, you may determine the default risk premium, given the company's bond rating, from the default risk premium table in the text. What yield would you predict for each of these two investments? Treasury Bond Risk-free rate = 4.00% Maturity: Expected inflation: Expected inflation: Expected inflation: 12 for the next for the next for the next Inflation premium = Maturity risk premium 2 years = 4 years = 6 years = 12 ((G17*D17)+(G18*D18)+(G19*D19))/D20 = .1*(C16-1)% 2% 3% 4% 3.33% 1.1% 12-year Treasury yield= 8.4% 7-year corporate bond Rating : A Risk-free rate = 4% Maturity: Expected inflation: Expected inflation: Expected inflation: 7 for the next for the next for the next 2 4 1 7 years years years = = = 2% 3% 4% Inflation premium = 2.86% Maturity risk premium= Liquidity premium= Default risk premium= 0.60% 0.7% (see screen to right for an alternative way to find the default risk premium.) Default Risk from text table: Rating DRP AAA 1.0% AA 1.2% A 1.5% BBB 1.9% BB+ 3.7% 7 year Corporate yield= Yield Spread = Corporate - Treasury = R:econciliation: Default premium Liquidity premium Inflation premium Maturity premium b. Given the following Treasury bond yield information from the September 28, 2001, Federal Reserve Statistical Release, construct a graph of the yield curve as of that date. Maturity Periods Years Yield 3 month 0.25 1.16% 6 month 0.50 1.17% 1 year 1.00 1.25% 2 year 2.00 1.62% 3 year 3.00 2.05% 5 year 5.00 2.92% 7 year 7.00 3.50% 10 year 10.00 3.95% 20 year 20.00 4.96% Now we can use Excel's chart wizard to construct a yield curve. 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 0.00 5.00 10.00 15.00 20.00 25.00 c. Based on the information about the corporate bond that was given in Part a, calculate yields and then construct a new graph that shows both the Treasury and the corporate bonds. The real risk-free rate would be the same for the corporate and treasury bonds. Similarly, without information to the contrary, we would assume that the maturity and inflation premiums would be the same for bonds with the same maturities. However, the corporate bond would have a liquidity premium and a default premium. If we assume that these premiums are constant across maturities, then we can use the LP and DRP premiums as determined above and add them to the T-bond yields to find the corporate yields. This procedure was used in the table below. Years 0.25 0.50 Treasury A-Corporate Spread LP DRP 1.00 2.00 3.00 5.00 7.00 10.00 20.00 Now we can graph the data in the first 3 columns of the above table to get the Treasury and corporate (A-rated) yield curves: Note that if we constructed yield curves for corporate bonds with other ratings, the higher the rating, the lower the curves would be. Note too that the DRP for different ratings can change over time as investors' (1) risk aversion and (2) perceptions of risk change, and this can lead to different yield spreads and curve positions. Expectations for inflation can also change, and this will lead to upward or downward shifts in all the yield curves