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    Yield on Corporate Bond

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    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)%. In other
    Maturity risk premium on a 2 year security is 0.1 %.

    10 year corporate bond yields 8.6%.
    What is the yield on an 8 year corporate bond that has the same default risk and liquidity as the ten-year bond?

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    Solution Preview

    To do this we fist need to find the 10 year treasury rate so as to get the default risk ...

    Solution Summary

    The solution explains how to calculate the yield on a corporate bond given the various components of total risk