a) The real risk-free rate is 2.65%. Inflation is expected to be 3.2% this year, 4.1% next year, and then 2.5% 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? Round your answer to two decimal places.
b) A company's 5-year bonds are yielding 8.7% per year. Treasury bonds with the same maturity are yielding 5.9% per year, and the real risk-free rate (r*) is 2.65%. The average inflation premium is 2.85%, and the maturity risk premium is estimated to be 0.1(t - 1)%, where t = number of years to maturity. If the liquidity premium is 1.35%, what is the default risk premium on the corporate bonds? Round your answer to two decimal places.