Yield Curves. Suppose the inflation rate is expected to be 7% next year, 5% the following, and 3% thereafter. Assume the real risk-free rate, r*, will remain at 2% and that maturity risk premiums on Treasury securities rise from zero on very short term bonds (those that mature in a few days) to 0.2% for 1-year securities. Furthermore, maturity risk premiums increase 0.2% for each year to maturity, up to a limit of 1.0% on 5-year or longer-term T-bonds. Calculate the interest rate on 1,2, 3, 4, 5, 10, and 20 year Treasury securities. Please show all work (steps involved). Thank you.
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