In: Finance
The real short-term risk-free rate is 1.5% and expected to stay constant. The inflation rate is expected to be 1% this year, 2% for each of the following 5 years, and 2.5% thereafter. The maturity risk premium is expected to be 0.0004 * T, where T is the number of years to maturity.
What is the expected yield on a 1-year Treasury bill?
part 2: What is the expected yield on a 3-year Treasury note?
part 3: What is the expected yield on a 30-year Treasury bond?
1)Expected yield on a 1-year Treasury bill = Risk free rate+ Inflation premium
= 1.5 + 1
= 2.50%
2)Average Inflation for 3 years = [IP1+IP2+IP3]/N
=[1+2+2]/3
= 5/3
= 1.67%
Maturity risk premium = .0004* 3 = .0012
Expected yield on 3 year Treasury note = Risk free rate +Inflation premium +Maturity risk premium
= 1.5+1.67+ .0012
= 3.1712%
3)Average Inflation for 30 years =[1+ (2*5)+(2.5*24)]/30
=[1+ 10+ 60]/30
= 71/30
= 2.37%
Maturity risk premium = .0004*30 = .012
expected yield on a 30-year Treasury bond =Risk free rate +Inflation premium +Maturity risk premium+Default risk premium +liquidity premium
= 1.5 +2.37+.012
= 3.882%