A 5-year a corporate bond has the same default risk premium


A 5-year Treasury bond has a 4.1% yield. A 10-year Treasury bond yields 6.35%, and a 10-year corporate bond yields 9.6%. The market expects that inflation will average 3.3% over the next 10 years (IP_10 = 3.3%). Assume that there is no maturity risk premium (MRP = 0) and that the annual real risk-free rate, r*, will remain constant over the next 10 years. A 5-year a corporate bond has the same default risk premium and liquidity premium as the 10-year corporate bond described. What is the yield on this 5-year corporate bond?

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Financial Management: A 5-year a corporate bond has the same default risk premium
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