Question

1- Interest rates on 4-year Treasury securities are currently 6.9%, while 6-year Treasury securities yield 7.35%. If the pure expectations theory is correct, what does the market believe that 2-year securities will be yielding 4 years from now? Calculate the yield using a geometric average. Do not round intermediate calculations. Round your answer to two decimal places.

2- A Treasury bond that matures in 10 years has a yield of 5.25%. A 10-year corporate bond has a yield of 7.25%. Assume that the liquidity premium on the corporate bond is 0.70%. What is the default risk premium on the corporate bond? Round your answer to two decimal places.

Answer 1

1.
=((1+6 year rate)^6/(1+4 year rate)^4)^(1/2)-1
=((1+7.35%)^6/(1+6.9%)^4)^(1/2)-1
=8.26%

2.
=yield on corporate bond-yield on Treasury bond-liquidity risk premium
=7.25%-5.25%-0.07%
=1.93%