In: Finance
Intro
The real short-term risk-free rate is 0.5% and expected to stay constant. The inflation rate is expected to be 1.4% this year, 2% for each of the following 5 years, and 2.5% thereafter. The maturity risk premium is expected to be 0.0004 * T, where T is the number of years to maturity.
Attempt 2/5 for 10 pts.
Part 1
What is the expected yield on a 1-year Treasury bill?
Part 2
What is the expected yield on a 3-year Treasury note?
Part 3
What is the expected yield on a 30-year Treasury bond?
Answer 1.
Real Risk-free Rate = 0.50%
Inflation Premium = 1.40%
Maturity Risk Premium = 0.0004 * 1
Maturity Risk Premium = 0.0004 or 0.04%
Expected Yield on 1-year T-Bill = Real Risk-free Rate +
Inflation Premium + Maturity Risk Premium
Expected Yield on 1-year T-Bill = 0.50% + 1.40% + 0.04%
Expected Yield on 1-year T-Bill = 1.94%
Answer 2.
Real Risk-free Rate = 0.50%
Inflation Premium = [1.40% + 2 * 2.00%] / 3
Inflation Premium = 1.80%
Maturity Risk Premium = 0.0004 * 3
Maturity Risk Premium = 0.0012 or 0.12%
Expected Yield on 1-year Treasury Note = Real Risk-free Rate +
Inflation Premium + Maturity Risk Premium
Expected Yield on 1-year Treasury Note = 0.50% + 1.80% +
0.12%
Expected Yield on 1-year Treasury Note = 2.42%
Answer 3.
Real Risk-free Rate = 0.50%
Inflation Premium = [1.40% + 5 * 2.00% + 24 * 2.50%] / 30
Inflation Premium = 2.38%
Maturity Risk Premium = 0.0004 * 30
Maturity Risk Premium = 0.012 or 1.20%
Expected Yield on 30-year Treasury Bond = Real Risk-free Rate +
Inflation Premium + Maturity Risk Premium
Expected Yield on 30-year Treasury Bond = 0.50% + 2.38% +
1.20%
Expected Yield on 30-year Treasury Bond = 4.08%