Suppose the real risk-free rate is 3.50%, the average future inflation rate is 2.25%, and a maturity premium of 0.10% per year to maturity applies, i.e., MRP 0.10%(t), where t is the years to maturity. What rate of return would you expect on a 5-year Treasury security, assuming the pure expectations theory is NOT valid? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average. a. 6.35% b. 6.05% c. 6.15% d. 6.25% e. 5.95% Which of the following statements is CORRECT? a. The yield on a 2-year corporate bond should always exceed the yield on a 2-year Treasury bond. b. The real risk-free rate increases if people expect inflation to increase. c. The yield on a 3-year Treasury bond should always exceed the yield on a 2-year Treasury bond. d. If inflation is expected to increase, then the yield on a 2-year bond will exceed that on a 3-year bond. e. The yield on a 3-year corporate bond should always exceed the yield on a 2-year corporate bond. A 5-year corporate bond has an 8% yield. A 10-year corporate bond has a 9% yield. The two bonds have the same default risk premium and liquidity premium. The real risk-free rate, r*, is expected to remain constant at 3%. Inflation is expected to be 3% a year for the next five years. After five years, inflation is expected to be constant at some rate, X, which may or may not be 3%. The maturity risk premium equals 0.1%(t - 1), where t equals time until the bond's maturity. What is the market's expectation today of the average level of inflation for Years 6 through 10, that is, what is X? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average. a. 1.5% b. 6.0% c. 7.0% d. 0.9% e. 4.0%