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Suppose the real risk free rate is 3.50%, the average future inflation rate is 2.50%, maturity premium of 0.02% per year to maturity applies, ie
Suppose the real risk free rate is 3.50%, the average future inflation rate is 2.50%, maturity premium of 0.02% per year to maturity applies, ie MPR=0.20%(t) where t is the years to maturity. Suppose 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 yield on a 5 years A rated corporate bond and on a 10 years treasury bon? Here we assume that thr pure expectations theory is not valid and disrevard any cross product terms.
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