Question: A 5-year Treasury bond has a 3.05% yield. A 10-year Treasury bond yields 6.4%, and a 10-year corporate bond yields 8.45%. The market expects that

A 5-year Treasury bond has a 3.05% yield. A 10-year Treasury bond yields 6.4%, and a 10-year corporate bond yields 8.45%. 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.

Suppose 2-year Treasury bonds yield 5.7%, while 1-year bonds yield 4.4%. r* is 1.5%, and the maturity risk premium is zero. Negative expected inflation rates, if any, should be indicated by a minus sign.

Using the expectations theory, what is the yield on a 1-year bond, 1 year from now? Calculate the yield using a geometric average. Do not round intermediate calculations. Round your answer to two decimal places. %
What is the expected inflation rate in Year 1? Do not round intermediate calculations. Round your answer to two decimal places. % What is the expected inflation rate in Year 2? Do not round intermediate calculations. Round your answer to two decimal places. %

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