Question: 1 a oneyear us treasury security has a market interest...
1. A one-year U.S. Treasury security has a market interest rate of 2.25 percent. If the expected real rate of interest is 1.5 percent, what is the expected annual inflation rate?
2. A 20-year U.S. Treasury bond has a 3.50 percent interest rate, while a same maturity corporate bond has a 5.25 percent interest rate. Real interest rates and inflation rate expectations would be the same for the two bonds. If a default risk premium of 1.50 percentage points is estimated for the corporate bond, determine the liquidity premium for the corporate bond.