Question

The real risk-free rate is 2.45%. Inflation is expected to be 3.45% this year, 4.75% next year, and 2.1% thereafter. The maturity risk premium is estimated to be 0.05 × (t - 1)%, where t = number of years to maturity. What is the yield on a 7-year Treasury note? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

Answer: Treasury note yield is 2.52%

Explanation: The equation is : bond yield = rea risk - free rate + average inflation + maturity risk premium

The number of years of maturity , t is 7 since it is a 7 year treasury note.

maturity risk premium = 0.05 * (t-1)% = 0.05 *(7-1)% = 0.3%

the inflation rate is given for the current year and next year and therafter(7 years - 2 years = 5years),it is a consatnt rate.

Average inflation over life of bond =(3.45%+4.75%+2.1%*5)/7 = 2.63%

Treasury note yield = 2.45% +2.63% + 0.3%

Treasury note yield = 2.52%