Question: A. A 5-year Treasury bond has a 4.85% yield. A 10-year Treasury bond yields 6%, and a 10-year corporate bond yields 9.95%. The market expects

A. A 5-year Treasury bond has a 4.85% yield. A 10-year Treasury bond yields 6%, and a 10-year corporate bond yields 9.95%. 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. What is the yield on this 5-year corporate bond? Round your answer to two decimal places.

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B. You read in The Wall Street Journal that 30-day T-bills are currently yielding 4.3%. Your brother-in-law, a broker at Safe and Sound Securities, has given you the following estimates of current interest rate premiums:

Inflation premium = 2.75%
Liquidity premium = 1.0%
Maturity risk premium = 2.00%
Default risk premium = 2.90%

On the basis of these data, what is the real risk-free rate of return? Round your answer to two decimal places.

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