Question

The real risk-free rate is 2.5%. Inflation is expected to be 2.5% this year and 4% 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

Yield on a treasury is calculated as follows:

r = rf + IP + MRP ….. equation 1

where,

r = yield on treasury securities

rf = real risk free rate

IP = inflation premium

MRP = maturity risk premium

a) Inflation premium for a 2 - year securities = (2.5% + 4%) /
2

= 3.25%

putting in equation 1

Yield for a 2- year Treasury securities = 2.5% + 3.25% + 0%

= **5.75%
Yield on 2-year treasury securities is 5.75%**

b) Inflation premium for a 3-year treasury securities = (2.5% + 4% + 4% ) / 3

= 3.50%

putting in equation 1

Yield for a 3- year Treasury securities = 2.5% + 3.50% + 0%

=

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