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b) Suppose most investors expect the inflation rate to be 5% next year, 6% the following...

b) Suppose most investors expect the inflation rate to be 5% next year, 6% the following year, and 8% thereafter. The real risk-free rate is 3%. The maturity risk premium is zero for bonds that mature in 1 year or less and 0.1% for 2-year bonds; then the MRP increases by 0.1% per year thereafter for 20 years, after which it is stable. What is the interest rate on 1-, 10-, and 20-year Treasury bonds? Draw a yield curve with these data. What factors can explain why this constructed yield curve is upward sloping? Use graph to illustrate how would the yield curve facing a AAA-rated company and a BB-rated company compare with the yield curve for Treasury securities?

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