A 5-year Treasury bond has a 4.25% yield. A 10-year Treasurybond yields 6.25%, and a 10-year corporate bond yields 9.9%. Themarket expects that inflation will average 3.15% over the next 10years (IP10 = 3.15%). Assume that there is no maturityrisk premium (MRP = 0) and that the annual real risk-free rate, r*,will remain constant over the next 10 years. (Hint: Remember thatthe default risk premium and the liquidity premium are zero forTreasury securities: DRP = LP = 0.) A 5-year corporate bond has thesame default risk premium and liquidity premium as the 10-yearcorporate bond described. The data has been collected in theMicrosoft Excel Online file below. Use the spreadsheet and performthe required analysis to answer the question.
- What Is The Yield On This 5 Year Corporate Bond Round Your Answer To Two Decimal Places A 5 Year Treasury Bond Has A 4 1 (123.72 KiB) Viewed 25 times
A Interest rate premiums 1 2 3 5-year Treasury yield (T5) 4 10-year Treasury yield (T10) 5 10-year Corporate yield (C10) 6 Inflation Premium over 10 years (IP10) 7 Maturity Risk Premium (MRP) 8 9 DRP Treasury LP Treasury DRPC5+ LPc5 = DRPC10 + LPC10 10 11 12 Real risk-free rate, r* 13 14 Inflation premium over 5 years (IP5) 15 16 DRP10 + LP 10 17 18 5-year Corporate yield (C5) B 4.25% 6.25% 9.90% 3.15% 0.00% 0.00% 0.00% C D Formulas #N/A #N/A #N/A #N/A