Finance
posted by Mel on .
Interest rate premiums A 5year Treasury bond has a 5.2 percent yield. A 10year Treasury bond yields 6.4 percent, and a 10year corporate bond yields 8.4 percent. The market expects that inflation will average 2.5 percent over the next 10 years (IP10 _ 2.5%).
Assume that there is no maturity risk premium (MRP _ 0), and that the annual real riskfree 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 5year corporate bond has the same default risk premium and liquidity premium as the 10year corporate bond described above. What is the yield on this 5year corporate bond?

Does this sound right to my question?
10 year at 8.4% with an inflation of 2.5 over that same time period.
risk free stays the same LP is zero so those are really irrelavant.
so we need to figure out a five year equation of the above but with five years
8.4% shouldn't change due to its pretty much locked in
now the 2.5% predicted inflation is over ten years.
So that 2.5 needs to be broke down over a ten year span which is a quart of percent per year for ten years..and that quarter of percent needs to be broken down to a monthly percent
So a year is .25/12=0.020834of a percent per month.
So for five years would it be 0.020834 permonth for five years.
12 months is a year for five years is sixty months.
So maybe 0.020834*60=1.25% for the inflation for that five year period.