Suppose a 5-year Treasury bond has a 3.5% yield while a 10-year Treasury bond has a 5.5% yield. A 10-year

corporate bond has a 9% yield. The market expects that inflation will average 2.75% over the next 10 years

(IP10 2.75%). 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.

(5 points)

a. What does the market expect that inflation will average over the next five years?

b. A 5-year corporate bond has the same default risk premium and liquidity premium as the 10-year corporate

bond described above. What is the yield on this 5-year corporate bond?

Please show work so I can follow what was done