Question 1.

The real risk-free rate of interest, r*, is 3% and it is expected to remain constant over time. Inflation is expected to be 2% per year for the next 3 years and 4% per year for the next 5 years. The maturity risk premium is equal to 0.1 x t -1 %, where t = the bonds maturity. The default risk premium for a BBB-rated bond is 1.3%

1. What is the average expected inflation rate over the next 4 years?
2. What is the yield on a 4-year treasury bond?
3. What is the yield on a 4-year BBB rated corporate bond with a liquidity premium of 0.5%?
4. What is the yield on an 8-year Treasury bond?