Suppose the inflation rate is expected to be 2% next year, 3% the following year, and 5% thereafter. Assume that the real risk free rate will remain constant at 1% and that MRP = (0.25x(t-1))% where t is the number of years to maturity. The default risk premium on 5 year corporate bonds is 0.75% and the liquidity premium on 5 year corporate bonds is 0.25%.

a. Calculate the interest rate on a 5 year treasury security.

b. Calculate the interest rate on a 5 year security.