Problem:
Suppose the real risk-free rate is 3.50%. Inflation is expected to be 2% next year, 3% the following year and then 3.5% thereafter. There is a maturity premium of 0.08% per year to maturity i.e., MRP = 0.08%(t), where t is the years to maturity. Liquidity premiums of 0.5% and default risk premiums of 0.85% are standard.
Required:
Question: What would be the nominal return on a 10 year Treasury bond and a corporate bond with the same maturity?
Note: Please show guided help with steps and answer.