Question

can you solve: using a financial calculator: EXPECTED INTEREST RATE The real risk-free rate is 3%. Inflation is expected to be 3% this year, 4% next year, and 3 5% thereafter. The maturity risk premium is estimated to be 0 05 t 1 %, where t = number of years to maturity. What is the yield on a 7-year Treasury note?

Answer #1

Yield = Real risk free rate + Inflation premium + Market risk Premium + Default risk premium + Liquidity premium

Real = 0.03.

Inflation Premium = (Total Inflation rate for 7 years) / 7 years = (0.03 + 0.04 + 5 *0.035) / 7 years = 0.035

Market risk premium was provided in the problem as 0.05 x (t – 1)%

Market Risk Premium = 0.05 * ( 7.00 - 1.00)%

Market Risk Premium = 0.05 * 6% Market Risk Premium = 0.003

Default Risk Premium = 0.

Liquidity Premium = 0.

Yield on 7-year treasury note = 0.03 + 0.035 + 0.0030 =

**Yield on 7-year treasury note = 0.068 =
6.80%**

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