Problem 1:
If 10-year T-bonds have the yield of 5.2%, 10-year corporate bonds yield 7.5%, maturity risk premium on all 10-year bonds is 1.1%, and corporate bonds have 0.2% liquidity premium versus zero liquidity premium for T-bonds, what is default risk premium on corporate bond?
a) 2.00%
b) 2.10%
c) 2.20%
d) 2.30%
Problem 2:
Assume the interest rate on 1-year T-bond is 5.0% and that on 2-year T-bond is 6.0%. Supposing the pure expectations theory is correct, what is market's forecast for one -year rates 1 year from now?
a) 6.65%
b) 6.74%
c) 6.83%
d) 7.01%