Question: A 2-year Treasury bond has a 4.00% yield. A 5-year Treasury bond yields 6.00%, and a 5-year corporate bond yields 14.40%. The market expects that

A 2-year Treasury bond has a 4.00% yield. A 5-year Treasury bond yields 6.00%, and a 5-year corporate bond yields 14.40%. The market expects that inflation will average 3.0% over the next 5 years. Assume that MRP = [0.10 x (t-1)]%, where t is the number of years to maturity. Also assume that the annual real risk-free rate will remain constant over the next 5 years. A 2-year corporate bond has the same default risk premium and liquidity premium as the 5-year corporate bond described. What is the yield on this 2-year corporate bond? 12.50% 12.40% 12.30% 4.00%

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