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1) Describe the given terms as they apply to interest rates:

a) The real risk-free rate (r*)

b) The nominal risk-free rate (Rrf)

c) The inflation premium (IP)

d) The default risk premium (DRP)

e) The liquidity premium (LP)

f) The maturity risk premium (MRP)

2) Suppose real risk-free rate is 1%. Suppose also that inflation is expected to be 2% in coming year (year 1), 3% in next year after that (year 2), and 2% in year after that (year 3). Suppose also that default risk premium, liquidity premium, and maturity risk premium are 0%. These conditions are given, what would be yield on three-year treasury bonds today?

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M914137

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