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A 5-year Treasury bond has a 2.05% yield. A 10-year Treasury bond has a 3.5% yield. A 10-year corporate bond has an 8.5% yield. The

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A 5-year Treasury bond has a 2.05% yield. A 10-year Treasury bond has a 3.5% yield. A 10-year corporate bond has an 8.5% yield. The market expects that inflation will average 2% over the next 10 years (IP10=2%). The maturity risk premium is equal to 0.1(t-1)%, where t= the number of years at the bond's maturity. Assume that the annual real risk-free rate of interest, E, will remain constant over the next 10 years. (5 points) a. What does the market expect that inflation will average over the next five years? b. 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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