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1. The real risk-free rate is 2%. Inflation is expected to be 3% this year, 5% next year, and 2% thereafter. Maturity risk premium is expected to be 0.05*(t-1)%, where t=number of years. What is the yield on a 4 year treasury note?

2. The real risk-free rate is 1.5%. Inflation is expected to average 1% for the next 3 years and 2% for the 5 years thereafter. Assume that there is no MRP. A 7 year corporate bond has a yield of 8%, which includes a LP of 0.5%. What is the default premium?

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Category:- Financial Management
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