A 5-year Treasury bond has a 3.95% yield. A 10-year Treasury bond yields 6.3%, and a 10-year
Question:
A 5-year Treasury bond has a 3.95% yield. A 10-year Treasury bond yields 6.3%, and a 10-year corporate bond yields 8.7%. The market expects that inflation will average 2.85% over the next 10 years (IP10 = 2.85%). 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. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below.
Open spreadsheet
What is the yield on this 5-year corporate bond? Round your answer to two decimal places.
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Interest rates on 4-year Treasury securities are currently 5.85%, while 6-year Treasury securities yield 7.35%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below.
Open spreadsheet
If the pure expectations theory is correct, what does the market believe that 2-year securities will be yielding 4 years from now? Calculate the yield using a geometric average. Do not round your intermediate calculations. Round your answer to two decimal places.
