Excel Online Structured Activity: Interest rate premiums

A $5-$year Treasury bond has a $3\mathrm{.}45\%$ yield. A $10-$year Treasury bond yields $6\mathrm{.}95\%,$ and a $10-$year corporate bond yields $8\mathrm{.}95\%.$ The market expects that inflation

average $3\mathrm{.}9\%$ over the next $10$ years $(I{P}_{10}=3\mathrm{.}9\%).$ 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: $DRP=LP=0$

$5-$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.

Interest rate premiums

$35-$year Treasury yield $(T_5)$

$10-$year Treasury yield $(T_{10})$

$510-$year Corporate yield $(C_{10})$

$6$ Inflation Premium over $10$ years $(I{P}_{10})$

$7$ Maturity Risk Premium $($MRP$)$

$8$ DRP Treasury

$9$ LP Treasury

Real risk$-$free rate, $r^{**}$

Inflation premium over $5$ years $(I{P}_5)$

$DR{P}_{10}+L{P}_{10}$

$5-$year Corporate yield $(C_5)$