Suppose you're considering two possible investment opportunities: a 12 year treasury bond in a seven-year, A-Rated

corporate bond. The current risk-free rate is 4% and inflation is expected to be 3% over the next two years, 4% for the following four years, and 5% there after. The maturity risk premium is estimated by this formula: MRP = .03(t-1)%. the liquidity premium for the corporate bond is estimated to be .2%. you may determine the default risk premium DRP given by the companies bond rating from the following table remember to subtract the bonds LP from the corporate spread given in the table to arrive at the Bonds DRP.

b. Suppose you are considering two possible investment opportunities: a 12-year Treasury maturity risk premium is estimated by this formula: MRP = 0.03(t-1)%. The liquidity pr the bond's LP from the corporate spread given in the table to arrive at the bond's DRP. Corporate Bond Yield Spread = DRP + LP Rate 0.73% U.S. Treasury AAA corporate AA corporate A corporate 0.93 1.31 1.73 0.20% 0.58 1.00 What yield would you predict for each of these two investments? Round your answers to t 12-year Treasury yield: % 7-year Corporate yield: %