Suppose the inflation rate is expected to be 6.3% next year, 4% the following year, and 3.5% thereafter. Assume that the real riskfree rate, r*, will remain at 1.55% and that maturity risk premiums on Treasury securities rise from zero on very shortterm bonds (those that mature in a few days) to 0.2% for 1year securities. Furthermore, maturity risk premiums increase 0.2% for each year to maturity, up to a limit of 1.0% on 5year or longerterm Tbonds. Calculate the interest rate on 2year Treasury securities. Round
your answer to two decimal places. Calculate the interest rate on 3year Treasury securities. Round
your answer to two decimal places. Calculate the interest rate on 4year Treasury securities. Round
your answer to two decimal places. Calculate the interest rate on 5year Treasury securities. Round
your answer to two decimal places. Calculate the interest rate on 10year Treasury securities.
Round your answer to two decimal places. Calculate the interest rate on 20year Treasury securities.
Round your answer to two decimal places. Select the correct yield curve based on these data.

1 year
=1.5%+6.3%+0.2%=8.00%
2 year
=1.5%+(6.3%+4%)/2+0.2%*2=7.05%
3 year
=1.5%+(6.3%+4%+3.5%)/3+0.2%*3=6.70%
4 year
=1.5%+(6.3%+4%+3.5%*2)/4+0.2%*4=6.625%
5 year
=1.5%+(6.3%+4%+3.5%*3)/5+0.2%*5=6.66%
10 year
=1.5%+(6.3%+4%+3.5%*8)/10+1%=6.33%
20 year
=1.5%+(6.3%+4%+3.5%*18)/20+1%=6.165%
The yield risk curve for the AAArated corporate bonds will be above the yield curve for the Treasury securities.
The yield risk curve of a much riskier lowerrated company will be above the yield curve for the Treasury securities and above the yield curve for the AAArated corporate bonds.
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