Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

A 5 - year Treasury bond has a 5 . 2 % yield. A 1 0 - year Treasury bond yields 7 . 0 %

A 5-year Treasury bond has a 5.2% yield. A 10-year Treasury bond yields 7.0%, and a 10-year corporate bond yields 8.7%. The market expects that inflation will average 2.0% over the next 10 years (IP10=2.0%). 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? Round your answer to one decimal place.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Gender And Finance

Authors: Ylva Baeckström

1st Edition

ISBN: 103205557X, 978-1032055572

More Books

Students also viewed these Finance questions

Question

25.0 m C B A 52.0 m 65.0 m

Answered: 1 week ago