Question

At? present, the real? risk-free rate of interest is 1.4?%, while inflation is expected to be 1.5?% for the next two years. If a? 2-year Treasury note yields 5.3?%, what is the? maturity-risk premium for this? 2-year Treasury? note?
The? maturity-risk premium for the? 2-year Treasury note is %?

If the real? risk-free rate of interest is 4.7 % and the rate of inflation is expected to be constant at a level of 3.2 %?, what would you expect? 1-year Treasury bills to return if you ignore the cross product between the real rate of interest and the inflation? rate?
The expected rate of return on? 1-year Treasury bills is ?%?

Answer 1

1)Average Inflation for 2 years : [1.5+1.5]/2 = 1.5%

.Yield on 2 year security =risk free rate+average inflation + maturity risk premium

   5.3 = 1.4 +1.5+ MRP

   MRP = 5.3 - 1.4 -1.5

       = 2.40 %

2) expected rate of return on? 1-year Treasury bills = risk free rate + inflation rate

                        = 4.7 + 3.2

                         = 7.9%