Week of February 25thFinance 301S.I.1. Define nominal rate of interest (r), real risk free rate of interest (r*), and nominal risk free rate(rrf).2. What are all of the determinants of interest rates? Write the equation for “r.”3. Fill in the following table by placing a check mark indicating which premiums are included in which of the following securities.Inflation PremiumMaturity Risk PremiumDefault Risk PremiumLiquidity PremiumST TreasuryLT TreasuryST CorporateLT Corporate 4. 30 day T-bills are currently yielding 5.5%. The following are current expected interest rate premiumsInflation Premium= 3.45%Liquidity Premium= 0.76%Maturity Risk Premium= 1.65%Default Risk Premium= 2.45%What is the real risk free rate of return? 5. Suppose 2 year Treasury bonds yield 5.5%, while 1 year bonds yield 4%. r* is 1.5% and the maturity risk premium is 0.Using the expectations theory, what is the yield on a 1-year bond, 1 year from now?6. A company’s 5 year bonds are yielding 7.85% each year. Treasury bonds with the same maturity are yielding 4.82% per year, and the real risk free rate (r*) is 2.3%. The average inflation premium is 2.5% and thematurity risk premium is estimated to be 0.1 X (t-1)% where t= years to maturity. If the liquidity premium is .8%, what is the default risk premium on the corporate bonds?7. The real risk free rate is 4%. Inflation is expected to be 2.5% in year one, 3.4% in year two and 5% each year following. The maturity risk premium is 0.05 (t-1)%. (t= number of years to maturity) What is the yield on a 6 year treasury
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