Please show your work. Suppose you are considering two possible investment opportunities: a $12-$year Treasury bond and a $7-$year, AA$-$rated corporate bond. The current real risk$-$free rate is $5\%,$ and inflation is expected to be $2\%$ for the next $2$ years, $3\%$ for the following $4$ years, and $4\%$ thereafter. The maturity risk premium is estimated by this formula: MRP $=0\mathrm{.}01($t $-1)\%.$ The liquidity premium $($LP$)$ for the corporate bond is estimated to be $0\mathrm{.}3\%.$ You may determine the default risk premium $($DRP$),$ given the company's bond rating, from the following table. Remember to subtract the bond's LP from the corporate spread given in the table to arrive at the bond's DRP$.$ Based on the information about the corporate bond provided in part b$,$ calculate yields and then construct a new yield curve graph that shows both the Treasury and the corporate bonds. Round your answers to two decimal places.

Interest Rate Determination and Yield Curves

b$.$ Finding the yield for each of the two investments

Maturity risk premium $=$

Liquidity premium

$12-$year Treasury Bond

Real risk$-$free rate

Maturity risk premium

$12-$year Treasury yield

$7-$year Corporate Bond

Real risk$-$free rate

Inflation premium

Maturity risk premium

Liquidity premium

Default risk premium

$7-$year corporate yield

c$.$ Constructing a graph of the yield curve

Formulas

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Ohese the Enent pank

Cheese the evereat treph. e$.$ Which part of the yield curve $($the left side or right side$)$ is likely to be most volatile over time?

Short$-$term rates are $|$ volatile than longer$-$term rates; therefore, the side of the yield curve would be most volatile over time.

f$.$ Using the Treasury yield information in part c$,$ calculate the following rates using geometric averages $($round your answers to three decimal places$)$:

$1.$ The $1-$year rate, $1$ year from now

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$2.$ The $5-$year rate, $5$ years from now

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$3.$ The $10-$year rate, $10$ years from now

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$4.$ The $10-$year rate, $20$ years from now

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