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1. Assume that the real risk-free rate is 3.5% and that inflation is expected to be 5% in year, 1,4% in Year 2, and 3.5% thereafter. Assume also that all Treasury bonds are highly liquid and free of default risk. If 2-year and 5-year treasury bonds both yield 11%, what is the difference in the maturity risk premiums (MRPs) on the two bonds; that is, what is MRP5 - MRP2?
a. 1.5 percent
b. 1.2 percent.
c. 0.9 percent.
d. 0.6 percent.
2. A noncallable bond has an original maturity of 20 years, an 9% coupon rate (coupons paid annually), and a face value of $1.000. The bond was issued exactly 5 years ago. If the bond is traded at $1.200 today, what is the yield to maturity on the bond?
a. 6.83%
b. 6.22%
c. 5.95%
d. 5.06%
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