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Use the following Treasury curve and forecast data: 1yr:3.0% 2 yr: 3.2% 3 yr: 3.5% 4 yr: 3.6% 5 yr: 3.8% 7 yr: 3.9% 10

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Use the following Treasury curve and forecast data: 1yr:3.0% 2 yr: 3.2% 3 yr: 3.5% 4 yr: 3.6% 5 yr: 3.8% 7 yr: 3.9% 10 yr: 4.0% 5yr TIPs: 0.5% 7yr TIPS: 0.8% Investor survey for average of short-term rates over the next 3 years: 3.1% Investor survey for average of short-term rates over the next 7 years: 3.4% Investor survey for average of short-term rates over the next 10 years: 3.4% 1) A 5-year corporate bond has a coupon of 4.0%, a market yield of 5%, a cumulative probability of default of 1.2%, and an expected recovery under default of 50%. What is the approximate risk premium and how does it relate to the spread? 2) What is the expected annual rate of inflation for the next 7 years? If you believed there is a more positive term premium in the Treasury curve relative to the TIPs curve does your estimate overstate or understate the inflation estimate? 3) What is the term premium for the next seven years? How does this specific number affect your interpretation of forward rates? Use the following Treasury curve and forecast data: 1yr:3.0% 2 yr: 3.2% 3 yr: 3.5% 4 yr: 3.6% 5 yr: 3.8% 7 yr: 3.9% 10 yr: 4.0% 5yr TIPs: 0.5% 7yr TIPS: 0.8% Investor survey for average of short-term rates over the next 3 years: 3.1% Investor survey for average of short-term rates over the next 7 years: 3.4% Investor survey for average of short-term rates over the next 10 years: 3.4% 1) A 5-year corporate bond has a coupon of 4.0%, a market yield of 5%, a cumulative probability of default of 1.2%, and an expected recovery under default of 50%. What is the approximate risk premium and how does it relate to the spread? 2) What is the expected annual rate of inflation for the next 7 years? If you believed there is a more positive term premium in the Treasury curve relative to the TIPs curve does your estimate overstate or understate the inflation estimate? 3) What is the term premium for the next seven years? How does this specific number affect your interpretation of forward rates

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