The real risk-free rate is 2.75%. Inflation is expected to be 2.50% this year and 5.00%...

The real risk-free rate is 2.75%. Inflation is expected to be 2.50% this year and 5.00% 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

For a 2-year security,

Inflation premium = (2.50% + 5%)/2 = 3.75%

Nominal yield = 2.75% + 3.75% = 6.50%

For a 3-year security,

Inflation premium = (2.50% + 5% + 5%)/3 = 4.17%

Nominal yield = 2.75% + 4.17% = 6.92%

jeff jeffy answered 2 years ago

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