Question

The real risk-free rate of interest is 3%. Inflation is expected to be 1% this year...

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.

Homework Answers

Answer #1

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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