Question$-1$:

A $7-$year Treasury bond has a $7\mathrm{.}2\%$ yield. A $10-$year Treasury bond yields $7\mathrm{.}8\%,$ and a $10-$year corporate bond yields $10\mathrm{.}4\%.$

The market expects inflation to average $2\mathrm{.}5\%$ over the next $10$ years $($IP$10-2\mathrm{.}5\%).$ Assume 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.

A $7-$year corporate bond has the same default risk premium and liquidity premium as the $10-$year corporate bond described. Suppose the liquidity premium for corporate bonds is LP$=0.$

A$)$ What is the yield on this $7-$year corporate bond?

B$)$ What would be the yield on a $7-$year corporate bond ff LP$=0\mathrm{.}25\%$