What inflation premium is built into 5-year bond yields

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Reference no: EM131989278

Sonny Corporation's 5-year bonds yield 6.65%, and 5-year T-bonds yield 4.75%.

The real risk-free rate is r* = 3.60%, the default risk premium for Sonny's bonds is DRP = 1.00% versus zero for T-bonds, the liquidity premium on Sonny's bonds is LP = 0.90% versus zero for Tbonds, and the maturity risk premium for all bonds is found with the formula MRP = (t - 1) × 0.1%, where t = number of years to maturity.

What inflation premium (IP) is built into 5-year bond yields?

Reference no: EM131989278

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