1. Assume that the real risk-free rate is 3.5% and that inflation is expected to be 5% in year, 1,4% in Year 2, and 3.5% thereafter. Assume also that all Treasury bonds are highly liquid and free of default risk. If 2-year and 5-year treasury bonds both yield 11%, what is the difference in the maturity risk premiums (MRPs) on the two bonds; that is, what is MRP5 - MRP2?

a. 1.5 percent

b. 1.2 percent.

c. 0.9 percent.

d. 0.6 percent.

2. A noncallable bond has an original maturity of 20 years, an 9% coupon rate (coupons paid annually), and a face value of $1.000. The bond was issued exactly 5 years ago. If the bond is traded at $1.200 today, what is the yield to maturity on the bond?

a. 6.83%

b. 6.22%

c. 5.95%

d. 5.06%