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.© BrainMass Inc. brainmass.com December 24, 2021, 6:48 pm ad1c9bdddf
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 = ...
The solution explains how to calculate the yield on the 5-year corporate bond