Assume that the interest rate on a one-year Treasury bill is 5.4 percent and the rate on a two-year Treasury note is 9.0 percent.

(a)If the expected real rate of interest is 2.4 percent, determine the inflation premium on the Treasury bill. (Round answer to 1 decimal place, e.g. 527.5.)

(b) Using the expected real rate of interest from Part A, if the maturity risk premium is expected to be zero, determine the inflation premium on the Treasury note. (Round answer to 1 decimal place, e.g. 527.5.)

Solutions

Expert Solution

a)Interest rate on 1 year treasury bill = Real interest+ Inflation premium

5.4%= 2.4%+ Inflation premium

Inflation premium= 5.4%-2.4%= 3%

b)Rate on 2 year Treasury Note= Real rate of interest+ Inflation premium+ MRP

9%= 2.4%+ Inflation premium+ 0%

Inflation premium= 9%-2.4%=6.6%

jeff jeffy answered 2 years ago

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