The real risk-free rate is expected to remain constant at 3

Reference no: EM13618929

The real risk-free rate is expected to remain constant at 3%. Inflation is expected to be 4% a year for the next four years, and then 3% a year thereafter. The maturity risk premium is 0.1(t - 1)%, where t equals the maturity of the bond. A 7-year corporate bond has a yield of 9.8%. What is the yield on a 10-year corporate bond that has the same default risk premium and liquidity premium as the 7-year corporate bond? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.

Reference no: EM13618929

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