Suppose a5-year Treasury bond has a 3.5% yield while a 10-year Treasury bond

8.Suppose a5-year Treasury bond has a 3.5% yield while a 10-year Treasury bond has a 5.5% yield. A 10-year corporate bond has a 9% yield. The market expects that inflation will average 2.75% over the next 10 years (IP10 2.75%). The maturity risk premium is equal to 0.1(t1)%, where tthe number of years at the bond’s maturity. Assume that the annual real risk-free rate of interest, r*, will remain constant over the next 10 years.(5 points)a.What does the market expect that inflation will average over the next five years?b.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?

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