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A 5-year Treasury bond has a 5.2% yield. A ten year Treasury bond yields 6.4 percent, and a ten year corporate bond yields 8.4 percent. The market expects that inflation will average 2.5 percent over the next 10 years [IP10 = 2.5 percent]. 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 five 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 five year corporate bond?

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