What is the yield on the five-year corporate bond

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Point 1: A 5-year Treasury bond has a 5.0% yield. A 10-year Treasury bond yields 6.5%, and a 10-year corporate bond yields 10.0%. The market expects that inflation will average 2.0% over the next 10 years (IP10 = 2.0%). 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.

Problem 1: What is the yield on this 5-year corporate bond? Round your answer to one decimal place.

Reference no: EM132485323

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