A 5 year treasury bond has a 3.25% yield. A 10-year treasury bond yields 6.5% an

Question

A 5 year treasury bond has a 3.25% yield. A 10-year treasury bond yields 6.5% and a 10 year corporate bond yields 9.95%. The market expects that inflation will average 1.8% over the next 10 years. Assume that there is no maturity risk premium and that the annual real risk free rate will remain constant over the next 10 years. 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? Round your answers to two decimal places. A 5 year treasury bond has a 3.25% yield. A 10-year treasury bond yields 6.5% and a 10 year corporate bond yields 9.95%. The market expects that inflation will average 1.8% over the next 10 years. Assume that there is no maturity risk premium and that the annual real risk free rate will remain constant over the next 10 years. 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? Round your answers to two decimal places.

Explanation / Answer

Let x is yield on 5 yr corporate bond

3.25/6.5 = x/9.95%

X = 9.95%/2 = 4.975% or 4.98%

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