Question

The real risk-free rate is 2.85%. Inflation is expected to be 3.85% this year, 4.85% next year, and 2.3% 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

The answer is "5.36%".

Step-by-step explanation:

R = real risk- free rates + premium inflation + risk default premium + premium liquidity + inflation rate maturity

The default risk premium or premium liquidity is 0.

`\text{Real risk-free rate}` =
`2.85 \%`

`\text{maturity risk premium}`=
`0.05 * (7-1) \%`

`= 0.05 * 0.06 \\\\ = 0.3 \%`

`\text{Inflation premium}`
`=((3.85 \%+4.85 \%+5 * 2.3 \% ))/(7)`

`=((8.70 \%+ 11.5 \% ))/(7)\\\\=((20.20 \% ))/(7)\\\\= 2.21 \%`

`R=2.85 \%+2.21 \% +0+0+0.3 \%`

`=5.36\%`