The Wall Street Journal reported interest rates of 4.334 percent, 4.286 percent, 4.151 percent, 4.094 percent, and 4.032 percent for three-year, four-year, five-year, six-year, and seven-year Treasury notes, respectively. Assume that the liquidity (maturity) premium on an N-year security is (N-1)*0.035%.

Calculate (carry at least 4 decimals) the expected short-term rates in Years 4 & 7, respectively, according to the Liquidity Premium Theory of interest rates.

Given that the default risk premium is 1.2% for investment grade bonds, and 3.8% for speculative (non-investment) grade bonds. To the nearest basis point, calculate the interest rates on the 4-year and 7- year B-rated bonds, respectively, based on your answers for part a.