Question: Suppose a 5-year Treasury bond has a 2.25% yield while a 10-year Treasury bond has a 4% yield. A 10-year corporate bond has a 6.5%

 Suppose a 5-year Treasury bond has a 2.25% yield while a

Suppose a 5-year Treasury bond has a 2.25% yield while a 10-year Treasury bond has a 4% yield. A 10-year corporate bond has a 6.5% yield. The market expects that inflation will average 2.15% over the next 10 years (1P10 = 2.15%). The maturity risk premium is equal to 0.1(t - 1)%, where t = the number of years at the bond's maturity. Assume that the annual real risk-free rate of interest, r*, will remain constant over the next 10 years. What is the 5-year expected inflation average and what is the yield on the 5-year corporate bond? 1%, 4.75% 0.90%, 5.25% 0.90%, 4.75% 0.75%, 4.75% 1%, 5.25%

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