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The real risk-free rate is 1.95%. Inflation is expected to be 2.95% this year, 4.85% next year, and 2.3% 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

The yield is computed as follows:

= Real risk free rate + Inflation premium + maturity risk premium

= 1.95% + [ (2.95% + 4.85% + 2.3% x 5) / 7 ] + 0.05 x (7 - 1)%

= 1.95% + 2.757142857% + 0.30%

= 5.01%

jeff jeffy answered 2 years ago

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