You have been given the following information regarding market interest rates; the risk-free rate (rrf) is 3%, the Inflation Premium (IP) is 2%, the Default Risk Premium (DRP) for A rated bonds is 2%, the Maturity Risk Premium for 5 year bonds is 1% and the Liquidity Premium for A rated bonds is 1%. Answer the following questions:

1. What is the real-risk free rate (r*)? (Round to 1 decimal point)

2. If the Federal Government were to issue a 5 year Treasury Bond, at what nominal rate would the Federal Government expect to issue the bond? (Round to 1 decimal point)

3. If Big Group Company, an A rated borrower, were to issue a 5 year Corporate Bond, at what nominal rate would BG Company expect to issue the bond? (Round to 1 decimal point)