Question

Suppose the rate of return on a 10-year T-bond is 5.50%, the expected average rate of inflation over the next 10 years is 2.30%, the MRP on a 10-year T-bond is 1.64%, no MRP is required on a Treasury Inflation Protected Security (TIPS), and no liquidity premium is required on any Treasury security. Given this information, what should the yield be on a 10-year TIPS? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.

Answer 1

the yield be on a 10-year TIPS is 1.56%

Step-by-step explanation:

The computation of the yield to be on 10 year TIPS is as follows:

Yield on 10 year TIPS is

= rate of return on 10 year T bond - Average inflation - MRP

= 5.50% - 2.30% - 1.64%

= 1.56%

Hence, the yield be on a 10-year TIPS is 1.56%

The same should be considered and relevant too