Suppose you are considering two possible investment opportunities: a $12-$year Treasury bond and a $7-$year, AA$-$rated corporate bond. The current real risk$-$free rate is $5\%,$ and inflation is expected to be

$3\%$ for the next $2$ years, $4\%$ for the following $4$ years, and $5\%$ thereafter. The maturity risk premium is estimated by this formula: MRP $=0\mathrm{.}02($t $-1)\%.$ The liquidity premium $($LP$)$ for the corporate

bond is estimated to be $0\mathrm{.}2\%.$ You may determine the default risk premium $($DRP$),$ given the company's bond rating, from the following table. Remember to subtract the bond's LP from the corporate spread given in the table to arrive at the bond's DRP$.$

What yield would you predict for each of these two investments? Round your answers to three decimal places.

$12-$year Treasury yield: $\%$

$7-$year Corporate yield: $\%$

d$.$ Based on the information about the corporate bond provided, calculate yields and then construct a new yield curve graph that shows both the Treasury and corporate bonds.

Years

$1$

$4$

$5$

$10$

$20$

$30$

Treasury vield

$5\mathrm{.}42\%$

$552\%$

$572\%$

$5\mathrm{.}77\%$

$5\mathrm{.}70\%$

$581\%$

$635\%$

$5\mathrm{.}98\%$

AA$-$corporate vield

$\%$

$\%$

$\%$

$\%$

$\%$

$\%$

$\%$