Part A. Suppose Valentina Industries’ 5-year corporate bonds yield 8%. The real risk-free rate, (r*) is 2%. Inflation is

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Part A. Suppose Valentina Industries’ 5-year corporate
bonds yield 8%. The real risk-free rate, (r*) is 2%. Inflation is
expected to be 6% this year, 5% next year, 4% the following year
and 3% per year thereafter. Valentinas maturity risk premium is
calculated using the formula, MRP = 0.1%* (t – 1), where t = number
of years to maturity. What is the yield on Valentinas 10-year
bonds given the same liquidity risk and default risk premiums apply
to both the 5 and 10-year bonds? The maturity risk premium is
calculated using the formula, MRP = 0.1%* (t – 1), where t = number
of years to maturity.
Part B.
Use the following information to calculate the interest rate on
a 10-year Treasury Note.
Inflation: next three years = 5.5%
year 4 and beyond = 4.5%
Real Risk-Free Rate (r*) = 2%
The maturity risk premium is calculated using the formula, MRP =
0.1%* (t – 1), where t = number of years to maturity.