The real short-term risk-free rate is 1.5% and expected to stay constant. The inflation rate is...

Free

50.1K

Verified Solution

Question

Finance

The real short-term risk-free rate is 1.5% and expected to stayconstant. The inflation rate is expected to be 1% this year, 2% foreach of the following 5 years, and 2.5% thereafter. The maturityrisk premium is expected to be 0.0004 * T, where T is the number ofyears to maturity.
What is the expected yield on a 1-year Treasury bill?
part 2: What is the expected yield on a 3-year Treasurynote?
part 3: What is the expected yield on a 30-year Treasurybond?

Answer & Explanation Solved by verified expert

3.8 Ratings (425 Votes)

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%

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

The real short-term risk-free rate is 1.5% and expected to stayconstant. The inflation rate is expected to be 1% this year, 2% foreach of the following 5 years, and 2.5% thereafter. The maturityrisk premium is expected to be 0.0004 * T, where T is the number ofyears to maturity.What is the expected yield on a 1-year Treasury bill?part 2: What is the expected yield on a 3-year Treasurynote?part 3: What is the expected yield on a 30-year Treasurybond?