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Information: Fill in the following table reflecting which premiums are added to r* for the different types of debt. Inflation Premium Maturity Risk Premium Default Risk Premium Liquidity Premium Short Term Treasury X Long Term Treasury X X Short Term Corporate X X X Long Term Corporate X X X X Equations: r = r* + IP + MRP + DRP + LP Problems: The real risk-free rate of interest is 3 percent. Inflation is expected to be 2 percent this year and 4 percent during the next 2 years. Assume that the maturity risk premium is zero. What is the yield on 3-year Treasury securities? r = r* + IP + MRP r = 3 + ((2+4+4)/3) + 0 r = 6.33% The real risk-free rate is 2.5%. Inflation is expected to average 2.8% a year for the next 4 years, after which time inflation is expected to average 3.75% a year. Assume that there is no maturity risk premium. An 8-year corporate bond has a yield of 8.3%. Assume that the liquidity premium on the corporate bond is 0.75%. What is the default risk premium on the corporate bond? r = r* + IP + MRP + DRP + LP 8.3 = 2.5 + (((2.8 *4)+(3.75*4))/8) + 0 + .75 + DRP DRP = 1.775% The real risk free rate is 3%, and inflation is expected to be 3.5% for the next 2 years. A 2 year treasury security yields 6.8%. What is the maturity risk premium for the 2 year security? r = r* + IP + MRP 6.8 = 3 + 3.5 + MRP MRP = .3  The real risk free rate is 4%. Inflation is expected to be 3% this year, 4% next year, and then 2% for the following 2 years. Assume that the maturity risk premium is 0. What is the yield on 2 year Treasury securities? What about 4 year treasury securities? r2 = r* + IP + MRP r2 = 4 + ((3+4)/2) + 0 r2 = 7.5% r4 = r* + IP + MRP r4 = 4 + ((3+4+2+2)/4) + 0 r4 = 6.75% You read in The Wall Street Journal that 30-day T-bills are currently yielding 5.5%. Your brother-in-law, a broker at Safe and Sound Securities, has given you the following estimates of current interest rate premiums: Inflation