A 30-year U.S. Treasury bond has a 4.0 percent interest rate. In contrast, a 10-year Treasury note has an interest rate of 2.5 percent. A maturity risk premium is estimated to be 0.2 percentage points for the longer maturity bond. Investors expect inflation to average 1.5 percentage points over the next 10 years. a) Estimate the expected real rate of return on the 10-year U.S. Treasury note. b) If the real rate of return is expected to be the same for the 30-year bond as for the 10-year note, estimate the average annual inflation rate expected by investors over the life of the 30-year bond.
A 30-year U.S. Treasury bond has a 4.0 percent interest rate. In contrast, a 10-year Treasury note has an interest rate of 2.5 percent. A maturity risk premium is estimated to be 0.2 percentage points for the longer maturity bond. Investors expect inflation to average 1.5 percentage points over the next 10 years. a) Estimate the expected real rate of return on the 10-year U.S. Treasury note. b) If the real rate of return is expected to be the same for the 30-year bond as for the 10-year note, estimate the average annual inflation rate expected by investors over the life of the 30-year bond.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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20- A 30-year U.S. Treasury bond has a 4.0 percent interest rate. In contrast, a 10-year Treasury note has an interest rate of 2.5 percent. A maturity risk premium is estimated to be 0.2 percentage points for the longer maturity bond. Investors expect inflation to average 1.5 percentage points over the next 10 years.
a) Estimate the expected real
b) If the real rate of return is expected to be the same for the 30-year bond as for the 10-year note, estimate the average annual inflation rate expected by investors over the life of the 30-year bond.
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