The real risk-free rate is 2.45%. Inflation is expected to be 3.45% this year, 4.85% next...

The real risk-free rate is 2.45%. Inflation is expected to be 3.45% this year, 4.85% next year, and 2.7% 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.

Expert Solution

Inflation premium is average of inflation over life of bond,

Inflation premium = [3.45% + 4.85% + (2.7% * 5)]/7 = 3.11%

Maturity risk premium = 0.05*(7 - 1)% = 0.3%

Nominal yield = 2.45% + 3.11% + 0.3% = 5.86%

jeff jeffy answered 2 years ago

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