A 5-year Treasury bond has a 4.9% yield. A 10-year Treasury bond yields 6.0%, and a 10-year corporate bond yields 8.6%. The market expects that inflation will average 2.8% over the next 10 years (IP10 = 2.8%). 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 one decimal place

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A:

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A: in this we have to calculate average inflation.

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Treasury Market

On-the-run securities are the most recently issued securities in the market depth and are therefore traded at some premium. The off-the-run securities are the ones issued just before the most recent ones. The on-the-run securities have a lower yield to the investor than the off-the-run securities.