Suppose the real risk free rate is 3.50%, the average future inflation rate is 2.50%, a

maturity premium of 0.02% per year to maturity applies, i.e., MRP = 0.20%(t), where

t is the years to maturity. Suppo

se also that a liquidity premium of 0.50% and a

default risk premium of 1.35% applies to A rated corporate bonds. What is the

difference in the yields on a 5 year A rated corporate bond and on a 10 year

Treasury bond? Here we assume that the pure expectations theory is NOT valid,

and disregard any cross

product terms, i.e., if averaging is required, use the arithmetic. Please help