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maturity, The liguidity premium on relevant 5 year secuntes is 0.5% and the default risk premium on relevant 5 -year securieies is 1 \%. a. What is the yield on a 1-year T-bill? Round your answer to one decimal place: 1.. What is the yield be a Syear T-band? Reund your anaver to erie decimal place. s c. What is the vield on a 5 -vear corporate bond? Round your answer to ine decimal place. The interest rate on debt, rr is equal to the real risk-free rate plus an inflation premium plus a delault risk premium plus a liquidity premium plus a maturity risk premium. The interest rate on debt, 1, is also equal to the risk-tree rate plus a default risk premium plus a lieuidity premium plus a matuncy nisk preniur. The real nok-free rate of interest may be thought of as the interest rote on Q.5. Treasury secunties in an inflabion free word. A tieasury thflation Protected securby (T1P5) is free of most nsks, and its value increases with inflotion. short-tem Tips are free of defaul, maturity, and lequidty nisk and of risk due to changes in the general level of interest rates. However, they are not free of chenges in the real rate, Our definien of the riak free rate assumes that, despite the recent downgrade, Treasury securities have no meaningful default risk, The inflation premium is equal to the average expected inflotisn rate aver the life of the security: Default means that a borrower will not make scheduled interest or princsal pevments, and affects the market interest rate on a bond. The. the bonds risk of default, the higher the market rate. The average default risk presmeim varies over time, and it tends to jet when the economy is weaker and borrowers are more likely to have a hard time paying of their debts: A liquid asset can be coriverted to cash quickly at a "fair market value." Real assets are generally Inuid than finaneial assets, but dHerent financial assets vary in their liquidity. Assets with higher trading volume are generally liquid. The average inuidity premium varies over time. The prices of leng term bsnds calsed rate nisk Therefare, a whenever intered rates rise. Eecause interest rates can and do occasianally rise, all long term bends, even freasury bonds, have an eiement of risk expesed to rate nsk, short-term bith are heavily esposed to rate risk. Athough investirg is shirt-term T-bulb preserves one's stathe than the interest incone on long term bends. provided by shart-tarm T-tills is Quantitative Problens An analyst evaluating securities has obtained the following information, The real rate of interest is 2.9% and is expected to remain canstiant tor the neat 5 years. Inillation is expected to be 2.4\% next year, 3.4\% the following year, 4.4% the thind yeac, and 5.4% every year thereafter. The matiarity nisk premium is escimated to be 0.1 ( t1)%, where t - number of years to maturity, The liguidity premium on relevant 5 year secuntes is 0.5% and the default risk premium on relevant 5 -year securieies is 1 \%. a. What is the yield on a 1-year T-bill? Round your answer to one decimal place: 1.. What is the yield be a Syear T-band? Reund your anaver to erie decimal place. s c. What is the vield on a 5 -vear corporate bond? Round your answer to ine decimal place. The interest rate on debt, rr is equal to the real risk-free rate plus an inflation premium plus a delault risk premium plus a liquidity premium plus a maturity risk premium. The interest rate on debt, 1, is also equal to the risk-tree rate plus a default risk premium plus a lieuidity premium plus a matuncy nisk preniur. The real nok-free rate of interest may be thought of as the interest rote on Q.5. Treasury secunties in an inflabion free word. A tieasury thflation Protected securby (T1P5) is free of most nsks, and its value increases with inflotion. short-tem Tips are free of defaul, maturity, and lequidty nisk and of risk due to changes in the general level of interest rates. However, they are not free of chenges in the real rate, Our definien of the riak free rate assumes that, despite the recent downgrade, Treasury securities have no meaningful default risk, The inflation premium is equal to the average expected inflotisn rate aver the life of the security: Default means that a borrower will not make scheduled interest or princsal pevments, and affects the market interest rate on a bond. The. the bonds risk of default, the higher the market rate. The average default risk presmeim varies over time, and it tends to jet when the economy is weaker and borrowers are more likely to have a hard time paying of their debts: A liquid asset can be coriverted to cash quickly at a "fair market value." Real assets are generally Inuid than finaneial assets, but dHerent financial assets vary in their liquidity. Assets with higher trading volume are generally liquid. The average inuidity premium varies over time. The prices of leng term bsnds calsed rate nisk Therefare, a whenever intered rates rise. Eecause interest rates can and do occasianally rise, all long term bends, even freasury bonds, have an eiement of risk expesed to rate nsk, short-term bith are heavily esposed to rate risk. Athough investirg is shirt-term T-bulb preserves one's stathe than the interest incone on long term bends. provided by shart-tarm T-tills is Quantitative Problens An analyst evaluating securities has obtained the following information, The real rate of interest is 2.9% and is expected to remain canstiant tor the neat 5 years. Inillation is expected to be 2.4\% next year, 3.4\% the following year, 4.4% the thind yeac, and 5.4% every year thereafter. The matiarity nisk premium is escimated to be 0.1 ( t1)%, where t - number of years to

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