Assume that the real interest rate is 2%, the default risk premium is 3%, the liquidity premium is 1%, and the maturity risk premium is 1% per year. Additional, the expected inflation rate is 3% next year, 1% the year after, and 10% from then on. What are the nominal interest rates for:

a) 1-year note?

b) 5-year note?

c) does this produce an inverted yield curve? Why or why not?

Answer rating: 100% (QA)

To calculate the nominal interest rates for the 1year note and 5year note we will need to add up t... View the full answer