Question:
A 5-year treasury bond has a 5% yield. a 10-year treasury bond has a 6% yield. a 10-year corporate bond has an 8% yield. the market expects that inflation will average 2.5% over the next 10 years (IP10=2.5%). Assume that there is no maturity risk premium (MRP=0), and that the annual real risk-free rate of interest, r*, will remain constant over the next 10 years. What does the market expect that inflation will average over the next five years? A 5-year corporate bond has the same default risk premium and liquidity premium as the 10-year corporate bond described above. What does market expect that inflation will average over the next five years.