In: Finance
One-year T-bill rates are 3% currently. If interest rates are expected to go up 3% after year 4 every year and after, what should be the required interest rate on a 10-year bond issued today?
rate at year 1 to 4= 3%
from year 5 it increases by 3% so it is 3+3=6%
and year 6 it is 9%.....
so on until year 10, where it is 21%.
Rate on 10 year bond=((1+3%)*(1+3%)*(1+3%)*(1+3%)*(1+6%)*(1+9%)*(1+12%)*(1+15%)*(1+18%)*(1+21%))^(1/10)-1=9.11%
answer: 9.11%