1.A particular securitys default risk premium is 2 percent. For all securities, the inflation risk premium is 1.75 percent and the real risk-free rate is 1.50 percent. The securitys liquidity risk premium is 0.25 percent and maturity risk premium is 0.85 percent. The security has no special covenants. Calculate the securitys equilibrium rate of return. (Round your answer to 2 decimal places.)

2.Suppose that the current 1-year rate (1-year spot rate) and expected 1-year T-bill rates over the following three years (i.e., years 2, 3, and 4, respectively) are as follows:

₁R₁ = 6%, E(₂r₁) = 7%, E(₃r₁) = 7.5%, E(₄r₁) = 7.85%

Using the unbiased expectations theory, calculate the current (long-term) rates for one-, two-, three-, and four-year-maturity Treasury securities. (Round your answers to 2 decimal places.)

Year	Current (Long-term) Rates
1		%
2		%
3		%
4		%

3.One-year Treasury bills currently earn 1.45 percent. You expect that one year from now, 1-year Treasury bill rates will increase to 1.65 percent. If the unbiased expectations theory is correct, what should the current rate be on 2-year Treasury securities? (Round your answer to 2 decimal places.)

4.One-year Treasury bills currently earn 3.45 percent. You expect that one year from now, 1-year Treasury bill rates will increase to 3.65 percent. The liquidity premium on 2-year securities is 0.05 percent. If the liquidity premium theory is correct, what should the current rate be on 2-year Treasury securities? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

5.You note the following yield curve in The Wall Street Journal. According to the unbiased expectations theory, what is the 1-year forward rate for the period beginning one year from today, ₂f₁? (Round your answer to 2 decimal places.)

Maturity		Yield
One day		2.00	%
One year		5.50
Two years		6.50
Three years		9.00