In: Finance
Year |
Inflation % |
inflation premium for a 1-year security? |
inflation premium for a 3-year security? |
Working |
||
Y1 |
1% |
1% |
1.00% |
a |
||
Y2 |
2% |
1.02% |
b |
Y1+2%of Y1 |
||
Y3 |
2% |
1.04% |
c |
Y2+2%of Y2 |
||
Total |
1.00% |
3.06% |
A |
|||
Yield on |
1-year Treasury bond |
3-year Treasury bond |
||||
Year |
real risk-free rate is |
4% |
4% |
inflation premium |
Working |
|
Y1 |
4% |
4% |
d |
0.0400% |
d*a |
|
Y2 |
0 |
4.16% |
e |
0.0424% |
e*b |
|
Y3 |
0 |
4.33% |
f |
0.0451% |
f*c |
|
real risk-free yield |
4.00% |
12.49% |
g |
0.1275% |
||
Add: maturity risk premium |
0 |
0 |
||||
Total Inflation Premium |
0.04% |
0.13% |
d*a |
|||
Total Yield |
4.04% |
12.62% |
B |
g |
||
Result |
Working |
|||||
Inflation premium for a 1-year security? |
1.00% |
A |
||||
Inflation premium for a 3-year security? |
3.06% |
A |
||||
yield on a 1-year Treasury bond |
4.04% |
B |
||||
yield on a 3-year Treasury bond |
12.62% |
B |