Suppose inflation rate is 6% for the past year. The inflation rate is expected to be...

Suppose inflation rate is 6% for the past year. The inflation rate is expected to be 5% in the coming year and 4% per year thereafter. Assume that the real risk free rate r*, will remain at 2% over the next 10 years. The yield on a 5-year Treasury bond is 6.3% and the yield on a 10-year corporate bond is 8.4%. A 5-year corporate bond has the same maturity risk premium as the 5-year Treasury bond described. The 5-year corporate bond also has the same default risk premium and liquidity premium as the 10-year corporate bond described. Given that the maturity risk premium for the 10-year corporate bond is 0.3%, what is the yield on the 5-year corporate bond?

Ans : 8.3%

Expert Solution

jeff jeffy answered 1 hour ago

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