Problems 1 and 2 are worth 5 points, the rest are worth 10 points.

Assume the real, risk free rate of interest is 2%.(This is r*.)

1.Inflation is expected to be 2% next year,

3% in 2 years, and

4% after that.

What is the inflation premium for

Year 1Year 2Year 3Year 4Year 5

2.The maturity risk premium can be found using the equation MRP=0.2%(t-1)

What is the maturity risk premium for

Year 1Year 2Year 3Year 4Year 5

3.The default risk premium + liquidity premium (DRP) = 2% for AAA bonds.

The default risk premium + liquidity premium = 2% + (0.5%t) for BBB bonds

What is the DRP for BBB bonds for

Year 1Year 2Year 3Year 4Year 5

4.Graph the yield curve for Government bonds, AAA bonds, and BBB bonds.

5.1 yr Treasury rates are 2%.2 yr Treasury rates are 3%.3 yr Treasury rates are 4%.

Under the pure expectations hypothesis, what you do you expect 1 year interest rates to be:

In one year?

In two years?

The face value of the bonds below all are $1000.

6.What is the price of a bond with a 10 year maturity, coupon rate of 5%, and YTM of 8%?

7.What is the YTM of a bond with a 6 year maturity, coupon rate of 6%, and price of 1020?

8.What is the coupon rate of a bond with a YTM of 8%, a price of $980, and a maturity of 5 years?

9.What is the YTM of a bond with a 6 year maturity, coupon rate of 6% and price of 1020?The bond pays semiannual coupons.

10.For the bond in problem 9, what is the:

a.Current Yield?

b.Capital Gains Yield?

c.Expected Total Yield?

11.What is the YTC of a 10 year bond with a price of 1050, coupon rate of 10%, and call provision where the bond may be called in 3 years at a price of 1050?