INTEREST RATE PREMIUMS A 5-year Treasury bond has a 5 2% yield. A 10-year Treasury bond yields 6 4%, and a 10-year corporate bond yields 8 4%. 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, 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. What is the yield on this 5-year corporate bond?

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