Question 1.)

One-year Treasury securities yield 4.55%. The market anticipates that 1 year from now, 1-year Treasury securities will yield 5.7%. If the pure expectations theory is correct, what is the yield today for 2-year Treasury securities? Calculate the yield using a geometric average. Do not round your intermediate calculations. Round your answer to two decimal places.

Question 2.)

A Treasury bond that matures in 10 years has a yield of 5.25%. A 10-year corporate bond has a yield of 8.5%. Assume that the liquidity premium on the corporate bond is 0.75%. What is the default risk premium on the corporate bond? Round your answer to two decimal places.

Question 3.)

You read in The Wall Street Journal that 30-day T-bills are currently yielding 5.7%. Your brother-in-law, a broker at Safe and Sound Securities, has given you the following estimates of current interest rate premiums:

Inflation premium = 3.25%

Liquidity premium = 0.7%

Maturity risk premium = 1.7%

Default risk premium = 2.45%

On the basis of these data, what is the real risk-free rate of return? Round your answer to two decimal places.

Question 4.)

The real risk-free rate is 3%. Inflation is expected to be 1.75% this year and 4.75% during the next 2 years. Assume that the maturity risk premium is zero.

What is the yield on 2-year Treasury securities? Do not round intermediate calculations. Round your answer to two decimal places. %

What is the yield on 3-year Treasury securities? Do not round intermediate calculations. Round your answer to two decimal places. %