The real risk free rate of interest r*, is 3% and it is expected to remain constant over time. Inflation is expected to be 2% for the next 3 years and 4% for the next 5 years. The maturity risk premium isequal to 0.1 (t-1)%, where t=the bond's maturity. The default risk premium for a BBB-rated bond is 1.3%.
a) What is the average expected inflation rate over the next 4 years?
b) What is the yield on a 4-year Treasury bond?
c) What is the yield on a 4-year BBB-rated corporate bond with a liqidity premium of 0.5%?
d) What is the yield on an 8-year Treasury bond?
e) What is the yield on and 8-year BBB-rated corporate bond with a liquidity premium of 0.5%?
f) If the yield on a 9-year Treasury bond is 7.3%, What does that imply about expected inflation in 9-years?