Question

Determinants of Interest Rates

The real risk-free rate is 3%. Inflation is expected to be 2% this year, 4% next year, and then 4% thereafter. The maturity risk premium is estimated to be 0.0003 x (t - 1), where t = number of years to maturity. What is the nominal interest rate on a 7-year Treasury security? Do not round intermediate calculations. Round your answer to two decimal places.

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Answer #1

Real Risk-free Rate = 3.00%

Inflation Premium = [2.00% + 4.00% + 5 * 4.00%] / 7

Inflation Premium = 26.00% / 7

Inflation Premium = 3.71%

Maturity Risk Premium = 0.0003 * (t - 1)

Maturity Risk Premium = 0.0003 * (7 - 1)

Maturity Risk Premium = 0.0018 or 0.18%

Nominal Interest Rate = Real Risk-free Rate + Inflation Premium
+ Maturity Risk Premium

Nominal Interest Rate = 3.00% + 3.71% + 0.18%

Nominal Interest Rate = 6.35%

So, nominal interest rate on a 7-year Treasury Security is 6.35%

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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?

EXPECTED INTEREST RATE
The real risk-free rate is 2%. Inflation is expected to be 1.5%
this year and 3.75% 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.
%

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thereafter. The maturity risk premium is estimated to be 0.05 × (t
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yield on a 7-year Treasury note? Do not round your intermediate
calculations. Round your answer to two decimal places.
2. A company's 5-year bonds are yielding 9.75%
per year. Treasury bonds with the same maturity...

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The real risk-free rate is 2.25%. Inflation is expected to be
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_______%
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intermediate calculations. Round your answer to two decimal places.
_______%

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