INFLATION AND INTEREST RATES The real risk-free rate of interest, r* , is 3%, and it is expected to remain constant over time. Inflation is expected to be 2% per year for the next 3 years and 4% per year for the next 5 years. The maturity risk premium is equal to 0.1 3 (t 2 1)%, where t = the bond’s maturity. The default risk premium for a BBB-rated bond is 1.3%. a. What is the average expected inflation rate over the next 4 years? b. What is the yield on a 4-year Treasury bond? c. What is the yield on a 4-year BBB-rated corporate bond with a liquidity premium of 0.5%?
INFLATION AND INTEREST RATES The real risk-free rate of interest, r*
, is 3%, and it is expected
to remain constant over time. Inflation is expected to be 2% per year for the next 3 years and 4% per year for the next 5 years. The maturity risk premium is equal to 0.1 3 (t 2 1)%, where t = the bond’s maturity. The default risk premium for a BBB-rated bond is 1.3%.
a. What is the average expected inflation rate over the next 4 years?
b. What is the yield on a 4-year Treasury bond?
c. What is the yield on a 4-year BBB-rated corporate bond with a liquidity premium of 0.5%?
d. What is the yield on an 8-year Treasury bond?
e. What is the yield on an 8-year BBB-rated corporate bond with a liquidity premium of 0.5%?
f. If the yield on a 9-year Treasury bond is 7.3%, what does that imply about expected
inflation in 9 years?
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