problem1: Suppose that interest rates on twenty year treasury and corporate bonds are as follows:
AAA = 8.72%
BBB = 10.18%
The differences in rates among these issues were caused primarily by:
[A] Maturity risk differences
[B] Inflation differences
[C] Real risk-free rate differences
[D] Tax effects
[E] Default risk differences
problem2: Assume one year T-bills currently yield 5.0 percent and the future inflation rate is expected to be constant at 3.10 percent per year. determine the real risk-free rate of return, r*? Disregard cross-product terms, i.e. if averaging is required, apply the arithmetic average.
problem3. Assume the real risk-free rate is 2.5 percent and the future rate of inflation is expected to be constant at 3.05 percent. Determine the rate of return would you expect on a five year treasury security, suppose the pure expectations theory is valid? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.