Question

A 5-year Treasury bond has a 3.7% yield. A 10-year Treasury bond yields 6.4%, and a 10-year corporate bond yields 9.25%. The market expects that inflation will average 3.3% over the next 10 years (IP10 = 3.3%). Assume that there is no maturity risk premium (MRP = 0) and that the annual real risk-free rate, r*, will remain constant over the next 10 years. (Hint: Remember that the default risk premium and the liquidity premium are zero for Treasury securities: DRP = LP = 0.) A 5-year corporate bond has the same default risk premium and liquidity premium as the 10-year corporate bond described. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below.

What is the yield on this 5-year corporate bond? Round your answer to two decimal places.

Answer #1

A 5-year Treasury bond has a 3.5% yield. A 10-year Treasury bond
yields 6.4%, and a 10-year corporate bond yields 9%. The market
expects that inflation will average 3.3% over the next 10 years
(IP10 = 3.3%). Assume that there is no maturity risk
premium (MRP = 0) and that the annual real risk-free rate, r*, will
remain constant over the next 10 years. (Hint: Remember that the
default risk premium and the liquidity premium are zero for
Treasury securities:...

A 5-year Treasury bond has a 4.2% yield. A 10-year Treasury bond
yields 6.7%, and a 10-year corporate bond yields 9.6%. The market
expects that inflation will average 2.7% over the next 10 years
(IP10 = 2.7%). Assume that there is no maturity risk
premium (MRP = 0) and that the annual real risk-free rate, r*, will
remain constant over the next 10 years. (Hint: Remember that the
default risk premium and the liquidity premium are zero for
Treasury securities:...

A 5-year Treasury bond has a 4.8% yield. A 10-year Treasury bond
yields 6.1%, and a 10-year corporate bond yields 8.45%. The market
expects that inflation will average 3.75% over the next 10 years
(IP10 = 3.75%). Assume that there is no maturity risk
premium (MRP = 0) and that the annual real risk-free rate, r*, will
remain constant over the next 10 years. (Hint: Remember that the
default risk premium and the liquidity premium are zero for
Treasury securities:...

A 5-year Treasury bond has a 4.9% yield. A 10-year Treasury bond
yields 6.45%, and a 10-year corporate bond yields 8.2%. The market
expects that inflation will average 1.65% over the next 10 years
(IP10 = 1.65%). Assume that there is no maturity risk
premium (MRP = 0) and that the annual real risk-free rate, r*, will
remain constant over the next 10 years. (Hint: Remember that the
default risk premium and the liquidity premium are zero for
Treasury securities:...

A 5-year Treasury bond has a 3.25% yield. A 10-year Treasury
bond yields 6.1%, and a 10-year corporate bond yields 8.5%. The
market expects that inflation will average 2.1% over the next 10
years (IP10 = 2.1%). Assume that there is no maturity
risk premium (MRP = 0) and that the annual real risk-free rate, r*,
will remain constant over the next 10 years. (Hint: Remember that
the default risk premium and the liquidity premium are zero for
Treasury securities:...

A 5-year Treasury bond has a 4.05% yield. A 10-year Treasury
bond yields 6.8%, and a 10-year corporate bond yields 9.8%. The
market expects that inflation will average 2.55% over the next 10
years (IP10 = 2.55%). Assume that there is no maturity risk premium
(MRP = 0) and that the annual real risk-free rate, r*, will remain
constant over the next 10 years. (Hint: Remember that the default
risk premium and the liquidity premium are zero for Treasury
securities:...

A 5-year Treasury bond has a 4.6% yield. A 10-year Treasury bond
yields 6.7%, and a 10-year corporate bond yields 9.9%. The market
expects that inflation will average 2.4% over the next 10 years
(IP10 = 2.4%). Assume that there is no maturity risk
premium (MRP = 0) and that the annual real risk-free rate, r*, will
remain constant over the next 10 years. (Hint: Remember that the
default risk premium and the liquidity premium are zero for
Treasury securities:...

A 5-year Treasury bond has a 4.4% yield. A 10-year Treasury bond
yields 6.85%, and a 10-year corporate bond yields 8.4%. The market
expects that inflation will average 1.5% over the next 10 years
(IP10 = 1.5%). Assume that there is no maturity risk
premium (MRP = 0) and that the annual real risk-free rate, r*, will
remain constant over the next 10 years. (Hint: Remember that the
default risk premium and the liquidity premium are zero for
Treasury securities:...

5-year Treasury bond has a 4.2% yield. A 10-year Treasury bond
yields 6.1%, and a 10-year corporate bond yields 8.3%. The market
expects that inflation will average 2.4% over the next 10 years
(IP10 = 2.4%). Assume that there is no maturity risk premium (MRP =
0) and that the annual real risk-free rate, r*, will remain
constant over the next 10 years. (Hint: Remember that the default
risk premium and the liquidity premium are zero for Treasury
securities: DRP...

Problem 6-17
Interest Rate Premiums
A 5-year Treasury bond has a 4.65% yield. A 10-year Treasury
bond yields 6.1%, and a 10-year corporate bond yields 8.8%. The
market expects that inflation will average 2.85% over the next 10
years (IP10 = 2.85%). Assume that there is no maturity
risk premium (MRP = 0) and that the annual real risk-free rate, r*,
will remain constant over the next 10 years. (Hint: Remember that
the default risk premium and the liquidity premium...

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