INTEREST RATE PREMIUMS

a. 7'2.1=9.20%; rn=8.40%; rn=7.60%; rre=7.30%; rn=7.20%; 7.7.10=6.60%; rno=6.30%
b. A 5-year Treasury bond has a 5.2% yield. A 10-year Treasury bond yields 6.4%, and a 10-year corporate bond yields 8.4%. The market expects that inflation will average 2.5% over the next 10 years (/Plo = 2.5%). 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?