A 5-year Treasury bond has a 5.2% yield. A 10-year Treasurybond yields 6.4%, and a 10-year corporate bond yields 8.4%. The market expects that inflationwill average 2.5% over the next 10 years (IP10 = 2.5%). Assume that there is no maturityrisk premium (MRP= 0) and that the annual real risk-free rate, r*, will remain constantover the next 10 years. (Hint: Remember that the default risk premium and the liquiditypremium are zero for Treasury securities: DRP = LP = 0.) A 5-year corporate bond has thesame default risk premium and liquidity premium as the 10-year corporate bond described.What is the yield on this 5-year corporate bond?
A 5-year Treasury bond has a 5.2% yield. A 10-year Treasurybond yields 6.4%, and a 10-year corporate bond yields 8.4%. The market expects that inflationwill average 2.5% over the next 10 years (IP10 = 2.5%). Assume that there is no maturityrisk premium (MRP= 0) and that the annual real risk-free rate, r*, will remain constantover the next 10 years. (Hint: Remember that the default risk premium and the liquiditypremium are zero for Treasury securities: DRP = LP = 0.) A 5-year corporate bond has thesame default risk premium and liquidity premium as the 10-year corporate bond described.What is the yield on this 5-year corporate bond?
Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 10P
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A 5-year Treasury bond has a 5.2% yield. A 10-year Treasury
bond yields 6.4%, and a 10-year corporate bond yields 8.4%. The market expects that inflation
will average 2.5% over the next 10 years (IP10 = 2.5%). 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: 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?
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