If the 10-year yield is 5% and expected inflation is 2%, what is the yield on the bond?

To determine the yield on the bond in this context, we need to consider the relationship between nominal yields, real yields, and inflation. The nominal yield on a bond is typically stated as the stated coupon rate or yield to maturity. In this case, the 10-year yield is 5%.

Given that the expected inflation rate is 2%, we can use the Fisher equation, which describes how nominal interest rates are related to real interest rates and expected inflation. The equation is as follows:

Nominal Yield = Real Yield + Expected Inflation

To find the real yield, we can rearrange this formula:

Real Yield = Nominal Yield - Expected Inflation

Inserting the values from the question:

Real Yield = 5% - 2% = 3%

This means that the yield on the bond, adjusted for the impact of expected inflation, is 3%. Investors are accounting for the loss of purchasing power due to inflation when they assess the yield they are receiving on the bond.