Suppose the inflation rate is expected to be 6% next year, 5% the following year, and 3% thereafter. Assume that the real risk-free rate, I will remain at 2% and that maturity risk premiums on Treasury securities rise from zero on very short-term bonds (those that mature in a few days) to 0.2% for 1-year securities. Furthermore, maturity risk premiums increase 0.2% for each year to maturity, up to a limit of 1.0% on 5-year or longer-term T-bonds. a. Calculate the interest rate on 1-, 2-, 3-, 4-, 5-, 10-, and 20-year Treasury securities. Round your answers to two decimal places, Treasury securities Interest rate 1-year 2-year 9 3-year 4-year 5-year % 10-year 20-year % % 96 Select the correct yield curve based on these data, Interest Rate (%) 9 5 4 3 24 6 8 10 12 14 16 18 Years to Maturity B Interest Rate (%) 91 8+ 71 61 4 3+ 2+ 1 2 2 4 6 8 10 12 14 16 18 Years to Maturity 101 Interest Rate (%) 9 8 7+ 6+ 5 4 3 2 1 ---------------------- 2 4 6 8 10 12 14 16 18 Years to Maturity D 101 Interest Rate (%) 9 8 7+ MacBook Pro D Interest Rate (%) 101 9 B 7 6 5 4 2 1 2 4 6 8 10 12 14 16 18 Years to Maturity The correct sketch is Select b. Suppose a AAA rated company (which is the highest bond rating a firm can have) had bonds with the same maturities as the Treasury bonds. Estimate what you believe a AAA-rated company's yield curve would look like on the same graph with the Treasury bond yield curve. (Hint: Think about the default risk premium on its long-term versus its short-term bonds) The yield risk curve for the AAA-rated corporate bonds will -Select the yield curve for the Treasury securities c. What will be the approximate yield curve of a much risker lower rated company with a much higher risk of defaulting on its bonds? The yield risk curve of a much risker lower-rated company will be select the yield curve for the Treasury securities and select the yield curve for the AAA rated corporate bonds