1. The real risk-free rate is 2.6%. Inflation is expected to be 2.15% this year, 4.15% next year, and 2.65% thereafter. The maturity risk premium is estimated to be 0.05 × (t – 1)%, where t = number of years to maturity. What is the yield on a 7-year Treasury note? Do not round your intermediate calculations. Round your answer to two decimal places.
2. A company’s 5-year bonds are yielding 9.75% per year. Treasury bonds with the same maturity are yielding 4.85% per year, and the real risk-free rate (r*) is 2.25%. The average inflation premium is 2.2%, and the maturity risk premium is estimated to be 0.1 x (t – 1)%, where t = number of years to maturity. If the liquidity premium is 0.95%, what is the default risk premium on the corporate bonds? Round your answer to two decimal places.
3. A 5-year Treasury bond has a 4.85% yield. A 10-year Treasury bond yields 6.7%, and a 10-year corporate bond yields 9.75%. The market expects that inflation will average 1.5% over the next 10 years (IP10 = 1.5%). Assume that there is no maturity risk premium (MRP = 0) and that the annual real risk-free rate, r*, will remain constant over the next 10 years. (Hint: Remember that the default risk premium and the liquidity premium are zero for Treasury securities: DRP = LP = 0.) A 5-year corporate bond has the same default risk premium and liquidity premium as the 10-year corporate bond described. What is the yield on this 5-year corporate bond? Round your answer to two decimal places. Get Finance homework help today