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    Yield on the bond

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    A fixed-income estimator has made the following assessments:

    (1) The real risk-free rate is expected to remain at 2.5 percent for the next ten years.
    (2) Inflation is expected to be 3 percent this year, 4 percent next year, and 5 percent a year thereafter.
    (3) The maturity risk premium is 0.1%(t - 1), where t = the maturity of the bond (in years).

    A five-year corporate bond currently yields 8.5 percent. Showing the computations what will be the yield on the bond, one year from now, if the above assessments are correct, and the bond's default premium and liquidity premium remain unchanged?

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    https://brainmass.com/business/bond-valuation/yield-on-the-bond-61119

    Solution Preview

    A five-year corporate bond currently yields 8.5 percent. Showing the computations what will be the yield on the bond, one year from now, if the above assessments are correct, and the bond's default premium and liquidity premium remain ...

    Solution Summary

    Calculates yield on the bond given real risk-free rate, expected inflation and maturity risk premium.

    $2.19

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