Answer:
The yield on a 2-year treasury securities is 6.00%
While the yield on 3-year treasury securities is 6.33%
Step-by-step explanation:
Real-risk free rate = 3%
Inflation is expected to be 2% this year and 4% during the next 2 years
Also noting that maturity risk premium is zero
As a result, the yield on 2-year treasury securities is computed:
r= r* + IP + MRP
r*=real-risk free rate=3%
IP=average of this year inflation and that of two years' time
MRP=market risk premium=0
r = 3% + (2% + 4%) / 2 + 0
r = 6%
The yield of 3-year treasury securities is given thus:
r = r* + IP + MRP
r = 3% + (2% + 4% + 4%) / 3 + 0
Note that the IP is now taking into consideration average of the three inflation figures given.
r = 6.33%