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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 Summary

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

Solution Preview

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

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