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The real risk-free rate is 3.3%. Inflation is expected to be 2.3% this year, 3.85% next year, and 2.05% thereafter. The maturity risk premium is estimated to be 0.05 × (t - 1)%, where t = number of years to maturity. What is the yield on a 7-year Treasury note? Do not round intermediate calculations. Round your answer to two decimal places

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Expert Solution

For 2Year security,

Inflation premium = (2.3% + 3.85% + (5 * 2.05%)/7 = 2.34%

Maturity risk premium = 0.05 * (7 - 1)% = 0.30%

Nominal yield = 3.3% + 2.34% + 0.30% = 5.94%

jeff jeffy answered 2 years ago

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