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The real risk-free rate is 1.75%. Inflation is expected to be2.75% this year, 4.45% next...

The real risk-free rate is 1.75%. Inflation is expected to be 2.75% this year, 4.45% next year, and 2.1% 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

What is the yield on a 7-year Treasury note?

As per given data

Yield=Risk free rate+Inflation premium+maturity risk premium

1.Risk free rate=1.75%

2.Inflation premium=

1^st year=2.75%

2^nd year=4.45%

3^rd year and till 7^th year(5years)= 5* 2.1%=10.5%

Total=2.75%+4.45%+10.5%=17.7%

=17.7%/7=2.52857%

3. Maturity risk premium= 0.05 × (t - 1)%

=0.05*(7-1) %

=(0.05*6) %

=0.3 %

Therefore yield =1+2+3

1.75%+2.52857%+0.3%= 4.58% (round off to two decimal)

jeff jeffy answered 2 years ago

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