Question

The real risk-free rate is 2.50%. Inflation is expected to be 2.50% this year and 3.50% during the next 2 years. Assume that the maturity risk premium is zero.

What is the yield on 2-year Treasury securities? Do not round intermediate calculations. Round your answer to two decimal places.

  

What is the yield on 3-year Treasury securities? Do not round intermediate calculations. Round your answer to two decimal places.

  

Answer 1

The yield on 2 year treasury securities is computed as shown below:

= Real risk free rate + (Inflation this year + Inflation next year) / 2

= 2.50% + (2.50% + 3.50%) / 2

= 2.50% + 3%

= 5.50%

The yield on 3 year treasury securities is computed as shown below:

= Real risk free rate + (Inflation this year + Inflation next year + Inflation in 3rd year) / 3

= 2.50% + (2.50% + 3.50% + 3.50%) / 3

= 2.50% + 3.16666667%

= 5.67% Approximately

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