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You are considering an investment in a one-year government debt security with a yield of 5 percent or a highly liquid corporate debt security with

You are considering an investment in a one-year government debt security with a yield of 5 percent or a highly liquid corporate debt security with a yield of 6.5 percent. The expected inflation rate for the next year is expected to be 2.5 percent.

a. What would be your real rate earned on either of the two investments?

b. What would be the default risk premium on the corporate debt security?

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