Problem:
Inflation is anticipated to be 1% over the next year, 2% in year 2, and then level off at 3% indefinitely. If the real interest is 2%, the default risk premium is 1% and maturity risk premium is .02 % (t).
Required:
Question: What would be the interest rate on a 7 year T-bond and a 7 year corporate bond?
Note: Provide thorough explanation of the given question.