Coproate bond that has same default risk-liquidity premiums

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Reference no: EM131053044

The real risk -free rate, r*, is expected to reamin constant at 3%. Inflation is expected to be 2% a year for the next 3 years, and then 4% a year thereafter. The maturity risk premium 0.1% times (t minus1), where t equals the maturity of the bond. (The maturity risk premium on a 5 year bond is 0.4%). A 5 year coporate bond has a yield of 8.4%. What is the yield on a 7 year coproate bond that has the same default risk and liquidity premiums as the 5 year coproate bond. Note: consider theat the 5 year has inflation and maturity risk included, so you must remove those and replace those for the 7 year. Please show all work so I understand it.

Reference no: EM131053044

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