1) The real risk-free rate is 3.5%. Inflation is expected to be 2.05% this year, 3.95% next year, and 2.65% thereafter. The maturity risk premium is estimated to be 0.05 × (t - 1)%, where t = number of years to maturity. What is the yield on a 7-year Treasury note? Do not round your intermediate calculations. Round your answer to two decimal places.
2) Due to a recession, expected inflation this year is only 2.75%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 2.75%. Assume that the expectations theory holds and the real risk-free rate (r*) is 3%. If the yield on 3-year Treasury bonds equals the 1-year yield plus 3%, what inflation rate is expected after Year 1? Round your answer to two decimal places.
3) A bond has a $1,000 par value, 7 years to maturity, and a 9% annual coupon and sells for $1,095.
What is its yield to maturity (YTM)? Round your answer to two decimal places.
Assume that the yield to maturity remains constant for the next 4 years. What will the price be 4 years from today? Do not round intermediate calculations. Round your answer to the nearest cent.