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Suppose the rate of return on a 10-year T-bond is 4.05%, the expected average rate of inflation over the next 10 years is 2.0%, the MRP on a 10-year T-bond is 0.9%, no MRP is required on a TIPS, and no liquidity premium is required on any Treasury security. Given this information, what should the yield be on a 10-year TIPS? Di

1 Answer

6 votes

Answer:

1.15%.

Step-by-step explanation:

This can be calculated as follows:

Yield be on a 10-year TIPS = Rate of return on the 10 year T-bond - Average Inflation - Market Risk Premium (MRP)

Therefore, we have:

Yield be on a 10-year TIPS = 4.05% - 2.0% - 0.9% = 1.15%

Therefore, the yield on a 10-year TIPS should be 1.15%.

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