Question: 1. Explain the popular theories for the rationale of the term structure of interest rates.
2. (Calculating the default-risk premium) Assume 10-year Treasury bonds are yielding of 5%, while a 10-year corporate bond is yielding 7%. If the liquidity-risk premium on the corporate bond is 0.5%, what is the corporate bond's default-risk premium?
3. (Calculating the maturity-risk premium) Assume the real risk-free rate of interest is 3%, while inflation is expected to be 3% for the next 2 years. If a 2-year Treasury note yields 6.5%, what is the maturity-risk premium for this 2-year Treasury note?