Suppose the inflation rate is expected to be 7% next year, 5% the following year, and 3% thereafter. Assume that the real risk-free rate, r*, 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 % 3-year % 4-year % 5-year % 10-year % 20-year % Select the correct yield curve based on these data. Select the correct yield curve based on these data. A Interest Rate (%) 3 2 1 10+ 8 7 5 44 34 2- 1 3 **f****f****|****f*f****| 2 4 6 8 10 12 14 16 18 Years to Maturity B Interest Rate (%) 24 6 8 10 12 14 16 18 Years to Maturity 9587 OSAMNA 10 9 73 6- ************* 5- 4 3- NAMNL 8- ****f*********f****] 7: 6 4 5- C Interest Rate (%) 2 4 6 8 10 12 14 16 18 Years to Maturity D Interest Rate (%) 2 4 6 8 10 12 14 16 18 Years to Maturity 3 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 riskier lower-rated company with a much higher risk of defaulting on its bonds? The yield risk curve of a much riskier lower-rated company will be -Select- the yield curve for the Treasury securities and -Select- the yield curve for the AAA-rated corporate bonds