Question
Please answer these two questions. 1. A company's 5-year bonds are yielding 7.15% per year. Treasury bonds with the same maturity are yielding 5.65% per
Please answer these two questions.
1. A company's 5-year bonds are yielding 7.15% per year. Treasury bonds with the same maturity are yielding 5.65% per year, and the real risk-free rate (r*) is 2.35%. The average inflation premium is 2.90%, and the maturity risk premium is estimated to be 0.1 x (t - 1)%, where t = number of years to maturity. If the liquidity premium is 1.35%, what is the default risk premium on the corporate bonds? Round your answer to two decimal places.
2. A 5-year Treasury bond has a 4.95% yield. A 10-year Treasury bond yields 6%, and a 10-year corporate bond yields 8.05%. The market expects that inflation will average 2.55% over the next 10 years (IP10 = 2.55%). 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.
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