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The real risk-free rate of interest, r*, is 4%; and it is expected to remain constant over time. Inflation is expected to be 3% per

The real risk-free rate of interest, r*, is 4%; and it is expected to remain constant over time. Inflation is expected to be 3% per year for the next 3 years and 5% per year for the next 5 years. The maturity risk premium is equal to 0.1(t 1)%, where t is the number of years to the bonds maturity. The default risk premium for a BBB-rated bond is 1.3%. (15 marks) a) What is the average expected inflation rate over the next 4 years? b) What is the yield on a 4-year Treasury bond? c) What is the yield on a 4-year BBB-rated corporate bond with a liquidity premium of 0.5%? d) What is the yield on an 8-year Treasury bond? e) What is the yield on an 8-year BBB-rated corporate bond with a liquidity premium of 0.5%

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