Problem:
Suppose the real risk-free rate is 3.50%, inflation next year is expected to be 1.5%, 2.5% two years from now and 3% thereafter. There is a maturity premium of 0.02% per year to maturity i.e., MRP = 0.20 % (t), where t is the years to maturity. Suppose also that a liquidity premium of 0.50% and a default risk premium of 1.35% exist.
Required:
Question: What is the yield on a 5-year A-rated corporate bond and on a 10-year Treasury bond?
Note: Provide specific examples to support your answers.