Question: Question 5: Interest Rate Problems (2 parts, 10 points total) ______ 5a. The real risk-free rate of interest is 2%. Inflation is expected to be

Question 5: Interest Rate Problems (2 parts, 10 points total)

______ 5a. The real risk-free rate of interest is 2%. Inflation is expected to be 3% the next two years and 5% during the three years after that. Assume that the maturity risk premium is zero. What is the (approximate) yield on 3-year Treasury securities? (Show all work.

______ 5b. The real risk-free rate of interest is 2%. Inflation is expected to be 3% the next two years and 5% during the three years after that. Assume that the maturity risk premium is zero. What is the (approximate) yield on 5-year Treasury securities? (Show all work.)

Question 6: Stock Problem (1 part, 10 points)

______ 6a. Stock A has a beta of 1.2, while stock B has a beta of 0.6. The expected rate of return on an average stock is 12%. The risk-free rate of return is 7%. By how much does the required return on the riskier stock exceed the required return on the less risky stock? (Show all work.)

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