The real risk-free rate of interest, r*, is 3%. Inflation is expected to be 4% this year, 5 percent next year, and 3% per year thereafter. The maturity risk premium equals 0.1% (t-1), where t equals the bond's maturity. That is, a 5-year bond has a maturity risk premium of 0.4% or 0.004. A 5-year corporate bond yields 8%. What is the yield on a 10-year corporate bond that has the same default risk and liquidity premiums as the 5-year corporate bond?

The real risk-free rate of interest, r*, is 3%. Inflation is expected to be 4% this year, 5 percent next year, and 3% per year thereafter. The maturity risk premium equals 0.1% (t-1), where t equals the bond's maturity. That is, a 5-year bond has a maturity risk premium of 0.4% or 0.004. A 5-year corporate bond yields 8%. What is the yield on a 10-year corporate bond that has the same default risk and liquidity premiums as the 5-year corporate bond?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 10P

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