Purchase Solution

Yield on 5-year corporate bond

Not what you're looking for?

Ask Custom Question

Interest rate premiums A 5-year Treasury bond has a 5.2 percent yield. A 10-year Treasury
bond yields 6.4 percent, and a 10-year corporate bond yields 8.4 percent. The market
expects that inflation will average 2.5 percent over the next 10 years (IP10  2.5%).
Assume that there is no maturity risk premium (MRP  0), and that the annual real riskfree
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 above. What is the yield on this 5-year corporate bond?

I'm able to get the answer using a bond calculator, but I do not understand how to complete this and show all of my steps. I need help showing my steps.

Purchase this Solution
Solution Summary

The solution explains how to calculate the yield on the 5-year corporate bond

Solution Preview

Yield on Bond = Risk Free Rate + Inflation Premium + Maturity Risk Premium + Default Risk Premium + Liquidity Premium

Now it is given that the maturity risk premium is zero and for treasury bond the default risk premium and liquidity premium are zero.

The yield on the corporate bond = ...

Purchase this Solution
Free BrainMass Quizzes
Balance Sheet

The Fundamental Classified Balance Sheet. What to know to make it easy.

IPOs

This Quiz is compiled of questions that pertain to IPOs (Initial Public Offerings)

Marketing Research and Forecasting

The following quiz will assess your ability to identify steps in the marketing research process. Understanding this information will provide fundamental knowledge related to marketing research.

Paradigms and Frameworks of Management Research

This quiz evaluates your understanding of the paradigm-based and epistimological frameworks of research. It is intended for advanced students.

Writing Business Plans

This quiz will test your understanding of how to write good business plans, the usual components of a good plan, purposes, terms, and writing style tips.

View More Free Quizzes
Related BrainMass Solutions

  • Corporate bonds: real risk-free rate

    on how to determine the yield on a 7-year corporate bond that has the same default risk and liquidity premiums as a 5-year corporate bond.

  • Yield and interest rates

    The yield on a 3 year corporate bond will always exceed the yield on a 2 year corporate bond. c. The yield on a 3 year treasury bond will always exceed the year on a 2 year treasury bond. d. All of the answers above are correct. e.

  • Yield on a corporate bond

    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?

  • Average Inflation of a 5-year treasury bond

    226186 Average Inflation of a 5-year treasury bond A 5-year treasury bond has a 5% yield. a 10-year treasury bond has a 6% yield. a 10-year corporate bond has an 8% yield. the market expects that inflation will average 2.5% over the next 10 years (IP10

  • Yield on Corporate Bond

    53706 Yield on an 8-year corporate bond Real risk-free rate of interest is 2%. Market expects that inflation will 3% each year for the next 5 years. Average 5% a year following Maturity risk premium is estimated to be MRPt = 0.1(t - 1)%.

  • Multiple choice questions on bonds, yields

    The yield on a 2-year corporate bond will always exceed the yield on a 2-year Treasury bond. b. The yield on a 3-year corporate bond will always exceed the yield on a 2-year corporate bond. c.

  • Solve: Default Risk Premium on a Corporate Bond

    191386 Solve: Default Risk Premium on a Corporate Bond Question: A treasury bond that matures in ten years has a yield of 6 percent. A 10 year corporate bond has a yield of 8 percent.

  • Bond trading at premium or discount; maturity, yield, credit spread

    316086 Bond trading at premium or discount; maturity, yield, credit spread 1. Consider a five-year, default-free bond with annual coupons of 5% and a face-value of $1000.

  • Expected inflation

    61145 Market's expectation today of the average level of inflation for Years 6 - 10, A 5-year corporate bond has an 8 percent yield. A 10-year corporate bond has a 9 percent yield.

View More Related Solutions