The real risk-free rate of interest is 2 percent. Inflation is expected to be 4 percent this coming year, jump to 6 percent next year, and increase to 7 percent the year after (Year 3). According to the expectations theory, what should be the interest rate on 3-year, risk-free securities today? 6.17% O 7.17% 7.67% 6.67%

Treasury securities that matures in 8 years currently have a rate of 11.9 %. Inflation is expected to be 5 percent each of the next 3 years and 6 percent each year after the 3rd year. The maturity risk premium is estimated to be 0.2 (t-1). Where t is the zero. The real risk rate is assumened to be tconsint over time  what is the risk free rate of interest.   a. 6. 28 b. 4.88 C. 2.51 D. 4.68

Calculating interest rates The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be 8% per year for each of the next five years and 7% thereafter. The maturity risk premium (MRP) is determined from the formula: 0.1(t – 1)%, where t is the security’s maturity. The liquidity premium (LP) on all Smith and Carter Inc.’s bonds is 1.05%. The following table shows the current relationship between bond ratings and default risk premiums (DRP): Rating Default Risk Premium U.S. Treasury — AAA 0.60% AA 0.80% A 1.05% BBB 1.45% Q1. Smith and Carter Inc. issues fifteen-year, AA-rated bonds. What is the yield on one of these bonds? Disregard cross-product terms; that is, if averaging is required, use the arithmetic average. a. 12.33% b. 13.38% c. 6.05% d. 11.98% Q2. Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? Option a. A BBB-rated bond has a…

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