calculate LRP and Nominal interest rate Year 30Yr C-Bonds 3M-T-Bill 30Yr T-Bonds DRP MRP LRP RRFR...

calculate LRP and Nominal interest rate

Year	30Yr C-Bonds	3M-T-Bill	30Yr T-Bonds	DRP	MRP	LRP	RRFR	Inflation Premium Rate	Nominal Interest Rate
1987	9.38	5.78	8.59	0.79	2.81		2.08	3.7
1988	9.71	6.67	8.96	0.75	2.29		2.57	4.1
1989	9.26	8.11	8.45	0.81	0.34		3.31	4.8
1990	9.32	7.5	8.61	0.71	1.11		2.1	5.4
1991	8.77	5.38	8.14	0.63	2.76		1.18	4.2
1992	8.14	3.43	7.67	0.47	4.24		0.43	3
1993	7.22	3	6.59	0.63	3.59		0	3
1994	7.97	4.25	7.37	0.6	3.12		1.65	2.6
1995	7.59	5.49	6.88	0.71	1.39		2.69	2.8
1996	7.37	5.01	6.71	0.66	1.7		2.11

Expert Solution

All the bonds are traded on exchange. Hence, we can assume the Liquidity risk premium to be zero everywhere. Hence, LRP = 0

Nominal interest rate = RRFR + Inflation premium rate + DRP + MRP + LRP

Accordingly, Nominal interest rate has been calculated as the sum of real risk free rate (RRFR) and all the premiums. Please see the second row in the table below. That will help you understand how nominal interest rate has been calculated. If everything is correct, nominal interest rate will work out to be same as 30 year C bond rate. You can see that this indeed is the case below.

Year	30Yr C-Bonds	3M-T-Bill	30Yr T-Bonds	DRP	MRP	LRP	RRFR	Inflation Premium Rate	Nominal Interest Rate
				A	B	C	D	E	D + E + A + B + C
1987	9.38	5.78	8.59	0.79	2.81	-	2.08	3.7	9.38
1988	9.71	6.67	8.96	0.75	2.29	-	2.57	4.1	9.71
1989	9.26	8.11	8.45	0.81	0.34	-	3.31	4.8	9.26
1990	9.32	7.5	8.61	0.71	1.11	-	2.1	5.4	9.32
1991	8.77	5.38	8.14	0.63	2.76	-	1.18	4.2	8.77
1992	8.14	3.43	7.67	0.47	4.24	-	0.43	3	8.14
1993	7.22	3	6.59	0.63	3.59	-	0	3	7.22
1994	7.97	4.25	7.37	0.6	3.12	-	1.65	2.6	7.97
1995	7.59	5.49	6.88	0.71	1.39	-	2.69	2.8	7.59
1996	7.37	5.01	6.71	0.66	1.7	-	2.11	2.9	7.37

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