Question

The real risk-free rate is 3.00%. Inflation is expected to be 1.50% this year and 4.25% 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

= 3% + (1.50% + 4.25%) / 2

= 3% + 2.875%

= 5.88%

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

= 3% + (1.50% + 4.25% + 4.25%) / 3

= 3% + 3.3333%

= 6.33% Approximately

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