Use the following data to answer questions 5 and 6. Assume the following premiums reflect current market conditions:

• r* = 3.15%;
• IP (1-year bonds) = 2.35%;
• IP (3-year bonds) = 2.65%;
• IP (5-year bonds) = 2.90%;
• DRP (AAA corporate bonds) = 0.60%;
• DRP (AA+ corporate bonds) = 0.85%;
• LP (AAA corporate bonds) = 0.22%;
• LP (AA+ corporate bonds) = 0.30%;
• MRP = 0.1% × (t − 1) where t is the number of years to maturity.

1. Calculate the interest rate for a 1-year AA+ corporate bond.
2. Calculate the interest rate for a 5-year AA+ corporate bond.

Answer rating: 100% (QA)

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