One-year T-bill rates are 3% currently. If interest rates are expected to go up 3% after...

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?

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Expert Solution

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%

jeff jeffy answered 2 years ago

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