INFLATION AND INTEREST RATES The real risk-free rate of interest, r*, is 3%, and it is expectedto remain constant over time. Inflation is expected to be 2% per year for the next 3 years and 4% per year for the next 5 years. The maturity risk premium is equal to 0.1 3 (t 2 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 liquidity premium of 0.5%?d. What is the yield on an 8-year Treasury bond?e. What is the yield on an 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 expectedinflation in 9 years?
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