10. Problem 6.17 (Interest Rate Premiums)

10. Problem 6.17 (Interest Rate Premiums) eBook A 5-year Treasury bond has a 4.8% yield. A 10-year Treasury bond yields 6.0%, and a 10-year corporate bond yields 8.7%. The market expects that inflation will average 1.7% over the next 10 years (IPIO = 1.7%). Assume that there is no maturity risk premium (MRP = O) and that the annual real risk-free 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 O.) A 5-year corporate bond has the same default risk premium and liquidity premium as the 10-year corporate bond described. What is the yield on this 5-year corporate bond? Round your answer to one decimal place.