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Suppose a 5-year Treasury bond has a 5.25% yield while a 10-year Treasury bond has a 7.5% yield. A 10-year corporate bond has a 9.5%
Suppose a 5-year Treasury bond has a 5.25% yield while a 10-year Treasury bond has a 7.5% yield. A 10-year corporate bond has a 9.5% yield. The market expects that inflation will average 3.5% over the next 10 years (IP 10 = 3.5%). The maturity risk premium is equal to 0.1(t - 13%, where t = the number of years at the bond's maturity. Assume that the annual real risk-free rate of interest, r*, will remain constant over the next 10 years. What is the 5-year expected inflation average and what is the yield on the 5-year corporate bond? 1.5%, 7% O 1.75%, 7.25% 3.5%, 7.5% 1.75%, 7% 3.5%, 7.25%
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