QUESTION 5

Suppose 10-year T-bonds have a yield of 3.20% and 10-year corporate bonds yield 6.40%. Also, corporate bonds have a 0.58% liquidity premium versus a zero liquidity premium for T-bonds, and the maturity risk premium on both Treasury and corporate 10-year bonds is 1.45%. What is the default risk premium on corporate bonds?

QUESTION 6

Suppose the interest rate on a 1-year T-bond is 2.66%, that on a 2-year T-bond is 2.87%, that on a 3-year T-bond is 3.15%, and that on a 4-year T-bond is 3.36%. Assume that the pure expectations theory is valid, what is the yield on a 2-year T-bond expected to be two years from now? Round the intermediate calculations to 6 decimal places and final answer to 4 decimal places

QUESTION 10

Suppose the rate of return on a 10-year T-bond is 4.70%, the expected average rate of inflation over the next 10 years is 2.50%, the MRP on a 10-year T-bond is 1.25%, no MRP is required on a Treasury Inflation Protected Security (TIPS), and no liquidity premium is required on any Treasury security. Given this information, what should the yield be on a 10-year TIPS? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.