Question

The real risk-free rate is 2.1%. Inflation is expected to be 3.3% this year, 4.85% next year, and 3.3% 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? Do not round your intermediate calculations. Round your answer to two decimal places. %

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**Answer:**

r = Real risk-free rate + Inflation premium + Default risk premium + Liquidity premium+maturity risk premium

Default risk premium and Liquidity premium are 0.

Real risk-free rate=2.1%

maturity risk premium=0.05*(7-1)%=0.3%

Inflation premium=(3.3%+4.85%+5*3.3%)/7=3.52%

so r = Real risk-free rate + Inflation premium + Default risk premium + Liquidity premium

=2.1%+3.52%+0+0+0.3%

=**5.92%**

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