In: Finance
The real risk-free rate is 3.5%. Inflation is expected to be 2% this year and 3.75% during the next 2 years. Assume that the maturity risk premium is zero.
What is the yield on 2-year Treasury securities? Do not round intermediate calculations. Round your answer to two decimal places. %
What is the yield on 3-year Treasury securities? Do not round intermediate calculations. Round your answer to two decimal places. %
Inflation premium is average of inflation over life of bond.
For 2Year security,
Inflation premium = (2% + 3.75%)/2 = 2.875%
Nominal yield = 3.5% + 2.875% = 6.38%
For 3Year security,
Inflation premium = (2% + 3.75% + 3.75%)/3 = 3.17%
Nominal yield = 3.5% + 3.17% = 6.67%