Question

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
(IP_{10} = 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 = LP = 0.) A 5-year corporate bond has the
same default risk premium and liquidity premium as the 10-year
corporate bond described. What is the yield on this 5-year
corporate bond? Round your answer to two decimal places.

_______ %

Answer #1

1. Default risk premium + Liquidity premium = 10 year corporate bond yield - 10 year treasury bond yield

Default risk premium + Liquidity premium = 9.90% - 6.70%

**Default risk premium + Liquidity premium =
3.20%**

2. 5 year Corporate bond yield = 5 year treasury bond yield + Default risk premium + Liquidity premium

5 year Corporate bond yield = 4.60% + 3.20%

**5 year Corporate bond yield = 7.80%
(Answer)**

***Please comment if you face any difficulty and please
don't forget to provide positive rating***

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