The real risk-free rate of interest is 3%. Inflation is expected to be 1% this year and 6% during the next 2 years. Assume that the maturity risk premium is zero.
What is the yield on 2-year Treasury securities? Round your answer to two decimal places.
What is the yield on 3-year Treasury securities? Round your answer
to two decimal places.
Answer a.
Inflation Premium = (1.00% + 6.00%) / 2
Inflation Premium = 3.50%
Yield on Treasury Securities = Real Risk-free Rate + Inflation
Premium + Maturity Risk Premium
Yield on Treasury Securities = 3.00% + 3.50% + 0.00%
Yield on Treasury Securities = 6.50%
Answer b.
Inflation Premium = (1.00% + 6.00% + 6.00%) / 3
Inflation Premium = 4.33%
Yield on Treasury Securities = Real Risk-free Rate + Inflation
Premium + Maturity Risk Premium
Yield on Treasury Securities = 3.00% + 4.33% + 0.00%
Yield on Treasury Securities = 7.33%
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