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    Yield on a corporate bond

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    The real risk-free rate, r*, is 3%. Inflation is expected to be 4% this year, 5% next year, and 3% per year thereafter. The maturity risk premium equals 0.1%(t-1), where t equals the bond's maturity. A 5-year corporate bond yields 8%. What is the yield on a 10-year corporate bond that has the same default risk and liquidity premiums as the 5-year corporate bond? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.

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    Solution Preview

    The real risk-free rate, r*, is 3%. Inflation is expected to be 4% this year, 5% next year, and 3% per year thereafter. The maturity risk premium equals 0.1%(t-1), where t equals the bond's maturity. A 5-year corporate bond yields 8%. What is the yield on a 10-year corporate bond that has the same default risk and liquidity premiums as the 5-year corporate bond? Disregard cross-product terms, ...

    Solution Summary

    This solution calculates the yield on a 10 year corporate bond.

    $2.19

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