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(All Steps) 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

Question: 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 (IP 10 _ 2.5%).

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. (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?

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