The real risk-free rate is 2.75%. Inflation is expected to be 1.50% this year and 4.50%...

The real risk-free rate is 2.75%. Inflation is expected to be 1.50% this year and 4.50% during the next 2 years. Assume that the maturity risk premium is zero.

What is the yield on 2-year Treasury securities? Do not round intermediate calculations. Round your answer to two decimal places.

What is the yield on 3-year Treasury securities? Do not round intermediate calculations. Round your answer to two decimal places.

Expert Solution

2-Year Bond:

Inflation premium = (1.50% + 4.50%)/2 = 3.00%

Nominal yield = 2.75% + 3.00% = 5.75%

3-Year Bond:

Inflation premium = (1.50% + 4.50% + 4.50%)/3 = 3.50%

Nominal yield = 2.75% + 3.50% = 6.25%

jeff jeffy answered 2 years ago

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