Suppose the inflation rate is expected to be 2.5% next year, 1.5 % the following 3 years, and 1% thereafter. Assume that the real risk-free interest rate will remain at 2%. Maturity risk premium on a debt security is determined by 0.05% ( t 1) where t is the number of years to maturity of the debt security.

2. Suppose the inflation rate is expected to be 2.5% next year, 1.5% the following 3 years, and 1% thereafter. Assume that the real risk-free interest rate will remain at 2%. Maturity risk premium on a debt security is determined by 0.05% (t-1) where t is the number of years to maturity of the debt security a Calculate the interest rate on 1,5, and 10 year Treasury securities.. b) The following table provides quoted interest rates on various bonds with similar maturity. Using the data reported on the table, compute the default risk premium of BB corporate bond by taking the difference between the quoted interest rate on BB corporate bond and the quoted interest rate on the US Treasu Interest rate U.S. Treasury bond 2.53% BBB corporate 2.75% BB corporate 2.89% B corporate 3.06% c) Assume liquidity premium stays at 0.7% for a BB corporate bond, regardless of its years to maturity. Along with default risk premium (found in part b), information about expected inflation and maturity risk premium, calculate the interest rate on 1, 5, and 10 year BB bond. d) Plot the yield curve ofBB bond together with the yield curve of Treasury securities. e) Describe the yield curve for U.S. Treasury securities. f At any given maturity, how does the yield curve of the BB rated bond compare with the yield curve for U.S. Treasury securities? g) At any given maturity, how does the yield curve of an AA rated bond compare with the yield curves for U.S. Treasury and BB corporate bond? Explain