Question: A 5 - year Treasury bond has a 4 . 2 5 % yield. A 1 0 - year Treasury bond yields 6 % ,

A 5-year Treasury bond has a 4.25% yield. A 10-year Treasury bond yields 6%, and a 10-year corporate bond yields 8.6%. The market expects that inflation will average 3.15% over the next 10 years (IP10=3.15%). Assume that there is no maturity risk premium (MRP =0) 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 =0.) 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 two decimal places.

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer
Step: 1 Unlock blur-text-image
Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock
Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

Q:

Hello, the task is to answer and provide the step by step details to the following questions provided with the all the information. These questions are pulled from the uploaded images. You can read...

Q:

please answer An investor in Treasury securities expects inflation to be 1.5% in Year 1,2.1% in Year 2 , and 2.75% each year thereafter. Assume that the real risk-free rate is 2.45% and that this...

Q:

A 5 year Treasury bond has a 3.4% yield. A 10 year Treasury bond yields 4.5%, and a 10 year corporate bond yields 9.7%. The market expects that inflation will average 2.6% over the next 10 years....

Q:

The real risk-free rate, r, is 1.2%. Inflation is expected to average 1.1% a year for the next 4 years, after which time inflation is expected to average 3.8% a year. Assume that there is no maturity...

Q:

\begin{tabular}{|c|c|} \hline Interest rate premiums & \\ \hline 5-year Treasury yield (T5) & 3.00% \\ \hline 10-year Treasury yield (T10) & 6.00% \\ \hline 10-year Corporate yield (C10) & 9.70% \\...

Q:

Excel Online Structured Activity: Interest rate premiums A. 5 -year Treasury bond has a 3.95% yield. A 10 -year Treasury bond yields 6.35%, and a 10 -year corporate bond yields 8.45%. The market...

Q:

Excel Online Structured Activity: Interest rate premiums A 5 -year Treasury bond has a 4.6% yield. A 10 -year Treasury bond yields 6.95%, and a 10 -year corporate bond yields 8.15%. The market...

Q:

Review the attached pictures and answer the following questions: 1) What are the current mid yields for the following US treasuries? *5 year Treasury Bond *10 year Treasury Bond *30 year Treasury...

Q:

16. Problem 6.17 (Interest Rate Premiums) look A 5 year Treasury bond has a 4.9% yield. A 10 year Treasury bond yields 6.95, and a 10 year corporate bond yields 8.8%. The market expects that...

Q:

A 5 -year Treasury bond has a 5.4% yield. A 10 -year Treasury bond yields 6.9%, and a 10 -year corporate bond yields 9.2%. The market expects that inflation will average 2.5% over the next 10 years...

Q:

In what way does the state argue that morality supports its prosecution?

Q:

How many Work in Process accounts are maintained in a company that uses process costing?

Q:

4 John is a director of Derwent plc, a listed company. The board of Derwent received at its last meeting a report by Joe, the finance director of Derwent, that Derwents profits would be up by 30 per...

Q:

10) For a bond that pays cash interest (i.e., not a zero coupon bond), YTM is (a) always equal to the coupon rate (b) always equal to the current yield (c) is always less than the coupon rate (d) can...

Q:

How does the purpose of an executive summary differ from that of a letter of transmittal? (Objective 4)

Q:

Cynthia Robertson graduated from the University of Pittsburgh 14 months ago. She received a scholarship to offset some of her tuition while attending Pitt as an undergraduate, but she took out a loan...

Q:

You recently moved to Phoenix, Arizona, to accept a job with Multimedia Masters. Until you moved to Phoenix, you had no idea how brutal the sun could be. One of your colleagues at Multimedia Masters...