Problem 6-17 Interest Rate Premiums

A 5-year Treasury bond has a 3.1% yield. A 10-year Treasury bond yields 6.6%, and a 10-year corporate bond yields 8.9%. The market expects that inflation will average 1.95% over the next 10 years (IP₁₀ = 1.95%). 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 above. What is the yield on this 5-year corporate bond? Round your answer to two decimal places.