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A Treasury bond that matures in 10 years has a yield of 6 percent. A 10 -year corporate bond has a yield of 8 percent. Assume that the liquidity premium on the corporate bond is 0.5 percent. What is the default risk premium on the corporate bond?

The real risk-free rate is 3 percent, and inflation is expected to be 3 percent for the next 2 years. A 2-year Treasury security yields 6.2 percent. What is the maturity risk premium for the 2 -year security?

The problems included in this section are set up in such a way that they could be used as multiple-choice exam problems. Assume that the real risk-free rate is 2 percent and that the maturity risk premium is zero. If the nominal rate of interest on 1 -year bonds is 5 percent and that on comparable-risk 2 year bonds is 7 percent, what is the 1 -year interest rate that is expected for Year 2 ? What inflation rate is expected during Year 2 ? Comment on why the average interest rate during the 2 -year period differs from the 1 -year interest rate expected for Year 2.

The problems included in this section are set up in such a way that they could be used as multiple-choice exam problems. Assume that the real risk-free rate, \(k^{*}\), is 3 percent and that inflation is expected to be 8 percent in Year 1,5 percent in Year \(2,\) and 4 percent thereafter. Assume also that all Treasury bonds are highly liquid and free of default risk. If 2 -year and 5 -year Treasury bonds both yield 10 percent, what is the difference in the maturity risk premiums \(\left(M R P_{S}\right)\) on the two bonds; that is, what is \(M R P_{5}\) minus \(M R P_{2} ?\)