A 5-year Treasury bond has a 5.2% yield. A 10-year Treasury bond yields 7.0%, and a 10-year corporate bond yields 8.7%. The market expects that inflation will average 2.0% over the next 10 years (IP10 = 2.0%). 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 one decimal place. %
A 5-year Treasury bond has a 5.2% yield. A 10-year Treasury bond yields 7.0%, and a 10-year corporate bond yields 8.7%. The market expects that inflation will average 2.0% over the next 10 years (IP10 = 2.0%). 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 one decimal place. %
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:A 5-year Treasury bond has a 5.2% yield. A 10-year Treasury bond yields 7.0%, and a 10-year corporate bond yields 8.7%. The
market expects that inflation will average 2.0% over the next 10 years (IP10 = 2.0%). 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 one decimal place.
%
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