Question: Question 2 - Inflation and Interest Rates: The real risk-free rate of interest, is 3%; and it is expected to remain constant over time. Inflation

Question 2 - Inflation and Interest Rates: The real risk-free rate of interest, is 3%; and it is expected to remain constant over time. Inflation is expected to be 2% per year for the next 2 years and 4% per year for the next 6 years. The maturity risk premium (MRP) is equal to (0.1 xt-1 %), where t = the bond's maturity. The default risk premium for a BBB-rated bond is 13% a. What is the average expected inflation rate over the next 4 years? b. What is the yield on a 4-year Treasury bond? c. What is the yield on a 4-year AAA-rated corporate bond with a liquidity premium of 0.5%? d. What is the yield on an 8-year Treasury bond? e. What is the yield on an 8-year AAA-rated corporate bond with a liquidity premium of 0.5%? 1. If the yield on a 9-year Treasury bond is 73%, what does that imply about expected inflation in 9 years? Paragraph BEE

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