Suppose you are considering two possible investment opportunities: a $12-$year

Treasury bond and a $7-$year, A$-$rated corporate bond. The current real risk$-$free rate is

$4\%,$ and inflation is expected to be $2\%$ for the next $2$ years, $3\%$ for the following $4$

years, and $4\%$ thereafter. The maturity risk premium is estimated by this formula:

$MRP=0\mathrm{.}03(t-1)\%.$ The liquidity premium $($LP$)$ for the corporate bond is estimated

to be $0\mathrm{.}3\%.$ 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$.$

Corporate Bond Yield

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:

$\%$

PART B: Based on the information about the corporate bond provided in part b$,$ calculate yields and then construct a new yield curve graph that shows both the Treasury and the corporate bonds. Round your answers to two decimal places.

Years $\_\_\_\_$ Treasury yield $\_\_\_\_$A$-$corporate yield

$15\mathrm{.}27\_\_\_\_\_\_\_$

$25\mathrm{.}37\_\_\_\_\_\_$

$35\mathrm{.}58\_\_\_\_\_\_$

$45\mathrm{.}65\_\_\_\_$

$55\mathrm{.}57\_\_\_\_$

$105\mathrm{.}68\_\_\_\_$

$206\mathrm{.}27\_\_\_\_$

$305\mathrm{.}88\_\_\_\_$

PART C: Using the Treasury yield information in part c$,$ calculate the following rates using geometric averages $($round your answers to three decimal places$)$:

The $1-$year rate, $1$ year from now $\_\_\_\_\_\_\_\_\_\%$

The $5-$year rate, $5$ years from now $\_\_\_\_\_\_\_\_\_\%$

The $10-$year rate, $10$ years from now $\_\_\_\_\_\_\_\_\_\_\%$

The $10-$year rate, $20$ years from now $\_\_\_\_\_\_\_\_\%$