Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

A 5-year Treasury bond has a 4.55% yield. A 10-year Treasury bond yields 6.75%, and a 10-year corporate bond yields 8.45%. The market expects that

A 5-year Treasury bond has a 4.55% yield. A 10-year Treasury bond yields 6.75%, and a 10-year corporate bond yields 8.45%. The market expects that inflation will average 2.85% over the next 10 years (IP10 = 2.85%). 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 two decimal places.

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

More Books

Students also viewed these Finance questions

Question

What is Aufbau's rule explain with example?

Answered: 1 week ago