(Calculating the maturity-risk premium) At present, the real risk-free rate of interest is 1.81.8%, while inflation is expected to be 1.81.8% for the next two years. If a 2-year Treasury note yields 5.55.5%, what is the maturity-risk premium for this 2-year Treasury note?

The maturity-risk premium for the 2-year Treasury note is

nothing%. (Round to one decimal place.)

2(Inflation and interest rates) What would you expect the nominal rate of interest to be if the real rate is 4.34.3 percent and the expected inflation rate is 6.56.5 percent?

The nominal rate of interest is

nothing%. (Round to two decimal places.)

(Interest rate determination) You’re looking at some corporate bonds issued by Ford, and you are trying to determine what the nominal interest rate should be on them. You have determined that the real risk-free interest rate is 3.1 %3.1%, and this rate is expected to continue on into the future without any change. In addition, inflation is expected to be constant over the future at a rate of 3.9 %3.9%. The default-risk premium is also expected to remain constant at a rate of 2.7 %2.7%, and the liquidity-risk premium is very small for Ford bonds, only about 0.06 %0.06%. The maturity-risk premium is dependent upon how many years the bond has to maturity. The maturity-risk premiums are shown in the popup window: LOADING… . Given this information, what should the nominal rate of interest on Ford bonds maturing in 0-1 year, 1-2 years, 2-3 years, and 3-4 years be?

BOND MATURES IN:

MATURITY-RISK PREMIUM:

Data Table

BOND MATURES IN:

MATURITY-RISK PREMIUM:

0-1 year

0.05%

1-2 years

0.25%

2-3 years

0.75%

3-4 years

0.10%

The nominal rate of interest on Ford bonds maturing in 0-1 year should be

nothing%. (Round to two decimal places.)

The nominal rate of interest on Ford bonds maturing in 1-2 years should be

nothing%. (Round to two decimal places.)

The nominal rate of interest on Ford bonds maturing in 2-3 years should be

nothing%. (Round to two decimal places.)

The nominal rate of interest on Ford bonds maturing in 3-4 years should be

nothing%. (Round to two decimal places.)

Enter your answer in each of the answer boxes.

(Interest rate determination) If the 10-year Treasury bond rate is 6.4 %6.4%, the inflation premium is 2.4 %2.4%, and the maturity-risk premium on 10-year Treasury bonds is 0.3 %0.3%, assuming that there is no liquidity-risk premium on these bonds, what is the real risk-free interest rate?

The real risk-free interest rate is

nothing%. (Round to one decimal place.)

(Real interest rates: approximation method) If the real risk-free rate of interest is 4.2 %4.2% and the rate of inflation is expected to be constant at a level of 2.5 %2.5%, what would you expect 1-year Treasury bills to return if you ignore the cross product between the real rate of interest and the inflation rate?

The expected rate of return on 1-year Treasury bills is

nothing%. (Round to one decimal place.)