Interest Rates

Q1) The real risk-free rate of interest, k*, equals 3 percent. Inflation
is expected to be 3 percent per year over the next three years and then
4 percent per year thereafter. The maturity risk premium (MRP)
equals 0.05%(t - 1), where t = the maturity of the bond. A 6-year
corporate bond has a yield of 10 percent. A 9-year corporate bond
has the same default risk and liquidity premiums as the 6-year
corporate bond. What is the yield on the 9-year bond?

Q2) Six-year Treasury securities currently yield 6 percent, while 7-

year Treasury securities currently yield 6.2 percent. Assume that the
pure expectations theory holds. What does the market believe the rate
will be on 1-year Treasury securities six years from now?

Q3) The real risk-free rate of interest, k*, equals 3 percent. Inflation
is expected to be 3 percent per year over the next five years and then
3.5 percent per year thereafter. The maturity risk premium (MRP)
equals 0.05%(t - 1), where t = the maturity of the bond. An 8-year
corporate bond has a yield of 9.8 percent. A 10-year corporate bond
has the same default risk and liquidity premiums as the 8-year
corporate bond. What is the yield on the 10-year bond?
Q4) The real risk-free rate of interest, k*, equals 2.5 percent. Inflation
is expected to be 4 percent per year over the next three years and then
3.5 percent per year thereafter. The maturity risk premium (MRP)
equals 0.05%(t - 1), where t = the maturity of the bond. A 5-year
corporate bond has a yield of 8 percent. A 8-year corporate bond has
the same default risk and liquidity premiums as the 5-year corporate
bond. What is the yield on the 8-year bond?

Q5) Four-year Treasury securities currently yield 5 percent, while 5-

year Treasury securities currently yield 5.2 percent. Assume that the
expectations theory holds. What does the market believe the rate will
be on 1-year Treasury securities four years from now?