Suppose the real-risk free rate is 2%. Inflation is expected to average 5.25% each year for the next 3 years, 4.5% for 2 years after that, and 4% each year after that. The maturity risk premium is calculated using 0.1%(t - 1), where t equals the maturity of the bond. Liquidity premiums = 0.55% and default risk premiums = 1.5% for Whatley Inc.
a. What is the yield of a 10-year U.S. Treasury bond given the information above?
b. What is the yield on a 10-year bond for Whatley Inc. given the information above?
c. What is the yield spread on these two bonds?