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Suppose the real risk-free rate of interest is r*=4% and it is expected to remain constant over time. Inflation is expected to be 1.60% per
Suppose the real risk-free rate of interest is r*=4% and it is expected to remain constant over time. Inflation is expected to be 1.60% per year for the next 4 years and 3.80% per year for the next 6 years. The maturity risk premium is 0.1*t1%, where tt is number of years to maturity, a liquidity premium is 0.35%, and the default risk premium for a corporate bond is 1.40%.
Complete the following table by calculating yields on Treasury and corporate bonds of various maturity.
Value | |
The yield on a 5-year Treasury bond | |
The yield on a 5-year corporate bond | |
The yield on a 10-year Treasury bond | |
The yield on a 10-year corporate bond | |
Expected inflation in 11 years, if the yield on a 11-year Treasury bond is 8.10% |
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