Final answer:
The yield on a 6-year Treasury note is calculated by adding the real risk-free rate (1%), the average expected inflation rate over the 6 years (4.75%), and the maturity risk premium (0.45%), resulting in a yield of 6.20%.
Step-by-step explanation:
Calculating the Yield on a Treasury Note
To calculate the yield on a 6-year Treasury note, we need to consider the real risk-free rate, the expected inflation rate for each year, and the maturity risk premium. The real risk-free rate is given as 1%. The expected inflation rates are 4%, 4.5%, and 5% for the first, second, and the subsequent years, respectively. The maturity risk premium is described by the formula 0.09 × (t - 1)%, where t is the number of years to maturity.
For a 6-year Treasury note, the expected inflation rate would average out as follows: 4% for the first year, 4.5% for the second year, and 5% for each of the remaining four years. To find the average rate, we sum these rates and divide by 6, which equates to (4 + 4.5 + 5 + 5 + 5 + 5)/6 = 4.75%. Next, we calculate the maturity risk premium for a 6-year note using the formula: 0.09 × (6 - 1)% = 0.45%.
The yield on the Treasury note is then found by summing the real risk-free rate, the average expected inflation rate, and the maturity risk premium: 1% + 4.75% + 0.45% = 6.20%. Therefore, the yield on a 6-year Treasury note is 6.20%.