Suppose that you and most other investors expect the inflation rate to be 7% next year, to fall to 5% during the following year, and then to remain at a rate of 3% thereafter. Assume that the real risk-free rate, r*, will remain at 2% and that maturity risk premiums on government securities rise from zero on very short-term securities (those that mature in a few days) to a level of 0.2 percentage point for 1-year securities. Furthermore, maturity risk premiums increase 0.2 percentage point for each year to maturity, up to a limit of 1.0 percentage point on 5-year or longer-term bonds.

a. Calculate the interest rate on 1-, 2-, 3-, 4-, 5-, 10-, and 20-year Treasury securities, and plot the yield curve.

b. Now suppose Royal Bank bonds, rated A, have the same maturities as the government bonds. As an approximation, plot a Royal Bank yield curve on the same graph with the Government of Canada bond yield curve. 

c. Now plot the approximate yield curve of Rogers Communications, a more risky cable company.