Suppose the real risk-free rate of interest is r*=4%r*=4% and it is expected to remain constant over time. Inflation is expected to be 1.60% per year for the next two years and 3.80% per year for the next three years. The maturity risk premium is 0.1(t1)%0.1t1%, where tt is number of years to maturity, a liquidity premium is 0.35%, and the default risk premium for a corporate bond is 1.40%.

The average inflation during the first 3 years is .

What is the yield on a 3-year Treasury bond?

4.20%

8.28%

6.33%

6.53%

What is the yield on a 3-year BBB-rated bond?

6.53%

8.28%

6.88%

7.93%

If the yield on a 5year Treasury bond is 7.32% and the yield on a 6year Treasury bond is 7.75%, the expected inflation in 6 years is . (Hint: Do not round intermediate calculations.)