An analyst is evaluating securities in a developing nation where the inflation rate is very high. As a result, the analyst has been warned not to ignore the cross-product between the real rate and inflation. A 6-year security with no maturity, default, or liquidity risk has a yield of 20.84%. If the real risk-free rate is 6%, what average rate of inflation is expected in this country over the next 6 years?

The real risk-free rate, $r^{*}$, is 1.7%. Inflation is expected to average 1.5% a year for the next 4 years, after which time inflation is expected to average 4.8% a year. Assume that there is no maturity risk premium. An 11-year corporate bond has a yield of 8.7%, which includes a liquidity premium of 0.3%. What is its default risk premium?

The real risk-free rate is 2.5% and inflation is expected to be 2.75% for the next 2 years. A 2-year Treasury security yields 5.55%. What is the maturity risk premium for the 2-year security?

One-year Treasury securities yield 4.85%. The market anticipates that 1 year from now, 1-year Treasury securities will yield 5.2%. If the pure expectations theory is correct, what is the yield today for 2-year Treasury securities? Calculate the yield using a geometric average.

A company’s 5-year bonds are yielding 7% per year. Treasury bonds with the same maturity are yielding 5.2% per year, and the real risk-free rate $\left(\mathrm{r}^{*}\right)$ is 2.75%. The average inflation premium is 2.05%; and the maturity risk premium is estimated to be $0.1 \times(t-1) \%$, where t=number of years to maturity. If the liquidity premium is 0.7%, what is the default risk premium on the corporate bonds?

Suppose 2-year Treasury bonds yield 4.1%, while 1-year bonds yield 3.2%. $\mathbf{r}^{*}$ is 1%, and the maturity risk premium is zero. a. Using the expectations theory, what is the yield on a 1-year bond 1 year from now? Calculate the yield using a geometric average. b. What is the expected inflation rate in Year 1? Year 2?

An investor in Treasury securities expects inflation to be risk-free rate is 1.95% and that this rate will remain constant. Three-year Treasury securities yield 5.20%, while 5-year Treasury securities yield 6.00%. What is the difference in the maturity risk premiums (MRPs) on the two securities; that is, what is $\mathrm{MRP}_{5}-\mathrm{MRP}_{3} ?$

The real risk-free rate is 2.25%. Inflation is expected to be 2.5% this year and 4.25% during the next 2 years. Assume that the maturity risk premium is zero. What is the yield on 2-year Treasury securities? What is the yield on 3-year Treasury securities?

A Treasury bond that matures in 10 years has a yield of 5.75%. A 10-year corporate bond has a yield of 8.75%. Assume that the liquidity premium on the corporate bond is 0.35%. What is the default risk premium on the corporate bond?

Due to a recession, expected inflation this year is only 3.25%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 3.25%. Assume that the expectations theory holds and the real risk-free rate $\left(\mathrm{r}^{*}\right)$ is 2.5%. If the yield on 3-year Treasury bonds equals the 1-year yield plus 1.5%, what inflation rate is expected after Year 1?

You read in The Wall Street Journal that 30-day T-bills are currently yielding 5.8%. Your brother-in-law, a broker at Safe and Sound Securities, has given you the following estimates of current interest rate premiums: Inflation premium=3.25%. Liquidity premium=0.6%. Maturity risk premium=1.85%. Default risk premium=2.15%. On the basis of these data, what is the real risk-free rate of return?

The real risk-free rate is 2.05%. Inflation is expected to be 3.05% this year, 4.75% next year, and 2.3% thereafter. The maturity risk premium is estimated to be $0.05 \times(t-1) \%$, where t=number of years to maturity. What is the yield on a 7-year Treasury note?

Interest rates on 4-year Treasury securities are currently 6.7%, while 6-year Treasury securities yield 7.25%. If the pure expectations theory is correct, what does the market believe that 2-year securities will be yielding 4 years from now? Calculate the yield using a geometric average.

A 5-year Treasury bond has a 5.2% yield. A 10-year Treasury bond yields 6.4%, and a 10-year corporate bond yields 8.4%. The market expects that inflation will average 2.5% over the next 10 years $\left(\Pi_{10}=2.5 \%\right)$. Assume that there is no maturity risk premium (MRP=0) and that the annual real risk-free rate, $I^{*}$, will remain constant over the next 10 years. A 5-year corporate bond has the same default risk premium and liquidity premium as the 10-year corporate bond described. What is the yield on this 5-year corporate bond?