The real risk-free rate, r*, is 1.20%, and inflation is expected to be 2.20% this...
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The real risk-free rate, r*, is 1.20%, and inflation is expected to be 2.20% this year, 3.00% for the next two years, and 5.00% per year thereafter. The maturity risk premium is estimated to be 0.07%(t-1), where t = number of years to maturity. Liquidity risk premium is 0.75%, default risk premium is 1.25%. Questions Answers 1. What is the interest rate for 1-year Treasury bill (T-bill)? Answer% 2. What is the interest rate for 4-year Treasury bond? Answer% 3. What is the interest rate for 6-year Treasury bond? Answer% 4. What is the interest rate for 1-year Corporate bond? Answer% 5. What is the interest rate for 4-year Corporate bond? Answer% 6. What is the interest rate for 6-year Corporate bond? Answer% 7. Assume we believe PEH holds true (MRP = 0), what should be the yield of 5-year Treasury bond one year from now? Answer% 8. From your calculation in question 1-6. If you draw yield curves of Treasury-Bond and Corporate bond, which one should stay above? Answer 9. Without calculation, if you draw yield curves of two corporate bonds, one with BB+ and another one with AAA, which yield curve should stay above? Answer 10. From question 9, what factor causes the difference in credit rating of these two corporate bonds (BB+ and AAA)?
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