The real risk-free rate is 2.65%. Inflation is expected to be 3.65% this year, 4.85% next...

The real risk-free rate is 2.65%. Inflation is expected to be 3.65% this year, 4.85% 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

Risk free rate = 2.65%

Inflation average = Average of 7 yers

= (3.65%*1+4.85%*1+2.1%*5)/7

= 2.71428%

Maturity risk premium = 0.05*(t-1)%

= 0.05*(7-1)%

= 0.3%

Total Yield = 2.65% + 2.71428% + 0.3%

Yield on 7 year bond = 5.66428%

jeff jeffy answered 2 years ago

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