Suppose the real risk-free rate of interest is r*=5%r*=5% and it is expected to remain constant over time. Inflation is expected to be 1.60% per year for the next two years and 3.60% 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 1.30%.

The average inflation during the first 4 years is .

What is the yield on a 4-year Treasury bond?

5.30%

9.55%

7.90%

7.60%

What is the yield on a 4-year BBB-rated bond?

9.20%

9.55%

7.90%

8.25%

If the yield on a 5year Treasury bond is 8.20% and the yield on a 6year Treasury bond is 8.62%, the expected inflation in 6 years is . (Hint: Do not round intermediate calculations.)