Problem:
Interest rate premiums A 5-year Treasury bond has a 5.2 percent yield. A 10-year Treasury bond yields 6.4 percent, and a 10-year corporate bond yields 8.4 percent. The market expects that inflation will average 2.5 percent over the next 10 years (IP10 2.5%). Assume that there is no maturity risk premium (MRP 0), and that the annual real riskfree rate, r*, will remain constant over the next 10 years. (Hint: Remember that the default risk premium and the liquidity premium are zero for Treasury securities: DRP LP 0.) A 5-year corporate bond has the same default risk premium and liquidity premium as the 10-year corporate bond described above. What is the yield on this 5-year corporate bond?