1) Quantitative Problem: An analyst evaluating securities has obtained the following information. The real rate of interest is 2.6% and is expected to remain constant for the next 5 years. Inflation is expected to be 2.1% next year, 3.1% the following year, 4.1% the third year, and 5.1% every year thereafter. The maturity risk premium is estimated to be 0.1 (t - 1)%, where t = number of years to maturity. The liquidity premium on relevant 5-year securities is 0.5% and the default risk premium on relevant 5-year securities is 1%. a.What is the yield on a 1-year T-bill? Round your answer to one decimal place.

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b.What is the yield on a 5-year T-bond? Round your answer to one decimal place.

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c.What is the yield on a 5-year corporate bond? Round your answer to one decimal place.

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2)

You read inThe Wall Street Journalthat 30-day T-bills are currently yielding 5.4%. Your brother-in-law, a broker at Safe and Sound Securities, has given you the following estimates of current interest rate premiums:

• Inflation premium = 3.00%
• Liquidity premium = 0.5%
• Maturity risk premium = 1.40%
• Default risk premium = 2.30%

On the basis of these data, what is the real risk-free rate of return? Round your answer to two decimal places.

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