ear Treasury bond has a 4.8% yield. A 10-year Treasury bond yields 6.5%, and a 10-year corporate bond yields 9.6%. The market expects that inflation will average 2.2% over the next 10 years (IP10 = 2.2%). 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 plac
A 5-year Treasury bond has a 4.8% yield. A 10-year Treasury bond yields 6.5%, and a 10-year corporate bond yields 9.6%. The market expects that inflation will average 2.2% over the next 10 years (IP10 = 2.2%). 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.
Corporate Bond:
It represents a debt instrument issued by a company for the purpose of raising capital. The investor who purchases a corporate bond lends the money to the company and the company pays the investor a series of coupon payments.
Treasury Bond:
Also known as T-Bonds, they are U.S government debt securities with fixed rates and maturities ranging from 10 to 30 years.
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