What is the yield on a five-year corporate bond

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Question - An analyst evaluating securities has obtained the following information. The real rate of interest is 3% and is expected to remain constant for the next 5 years. Inflation is expected to be 2.2% next year, 3.2% the following year, 4.2% the third year, and 5.2% every year thereafter. The maturity risk premium is estimated to be 0.1 × (t - 1)%, where t = number of years to maturity. The liquidity premium on relevant 5-year securities is 0.5% and the default risk premium on relevant 5-year securities is 1%.

Required -

a. What is the yield on a 1-year T-bill?

b. What is the yield on a 5-year T-bond?

c. What is the yield on a 5-year corporate bond?

Reference no: EM133131492

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