1. The real risk-free rate is 2%, inflation is expected to be 3% this year and 4% next year. The maturity risk premium is zero. Ignoring any cross-product terms, what is the equilibrium rate of return on a 2-year Treasury bond today? Show work.
a. 5.5% b. 7% c. 3.5% d. 6.5%
2. Sumy Inc.'s bonds currently sell for $1,250 and have a par value of $1,000. They pay a $100 annual coupon and have a 20-year maturity, but they can be called in 5 years at $1,140 what is their yield to call (YTC)? Show work.
a. 6.90% b. 6.45% c. 7.88% d. 7.04%