An analyst evaluating securities has obtained the following information. The real rate of interest
is 2.9% and is expected to remain constant for the next 5 years. Inflation is expected to be 2.5%
next year, 3.5% the following year, 4.5% the third year, and 5.5% every year thereafter. The
maturity risk premium is estimated to be 0.1
(t
1)%, where t = number of years to maturity. The
liquidity premium on relevant 5-year securities is 0.5% and the default risk premium on relevant
5-year securities is 1%.
a. What is the yield on a 1-year T-bill? Do not round intermediate calculations. Round your
answer to one decimal place.
b. What is the yield on a 5-year T-bond? Do not round intermediate calculations. Round your
answer to one decimal place.
c. What is the yield on a 5-year corporate bond? Do not round intermediate calculations. Round
your answer to one decimal place.