Question: A 5 - year Treasury bond has a 5 . 5 % yield. A 1 0 - year Treasury bond yields 6 . 9 %

A 5-year Treasury bond has a 5.5% yield. A 10-year Treasury bond yields 6.9%, and a 10-year corporate bond yields 9.4%. The market expects that inflation will average 2.3% over the next 10 years (IP10=2.3%). 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 one decimal place.

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