Exam 6: Interest Rates

Kern Corporation's 5-year bonds yield 7.30% and 5-year T-bonds yield 4.10%.The real risk-free rate is r* = 2.5%,the default risk premium for Kern's bonds is DRP = 1.90% versus zero for T-bonds,the liquidity premium on Kern's bonds is LP = 1.3%,and the maturity risk premium for all bonds is found with the formula MRP = (t − 1)× 0.1%,where t = number of years to maturity.What is the inflation premium (IP)on all 5-year bonds?

If the Treasury yield curve is downward sloping,how should the yield to maturity on a 10-year Treasury coupon bond compare to that on a 1-year T-bill?