Question

The real risk-free rate is 3.25%. Inflation is expected to be 2% this year and 4.5% 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 2yr bond

r = real risk free rate + Inflation Premium + Market risk premium

            r = 3.25 + ((2+4.5)/2) + 0

            r = 6.5%

yield on 3yr bond

r = real risk free rate + Inflation Premium + Market risk premium

            r =3.25 + ((2+4.5+4.5)/3) + 0

            r = 6.92%