Suppose the current YTM on a 5-year T-Bond is 2.8% and the current YTM for a 1-year T-Bond is 0.75%. What is the 5-year term premium if the expected 1-year rates for thenext 4 years are 1.25%, 1.75%, 2.5%, and 3.25%?

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
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Suppose the current YTM on a 5-year T-Bond is 2.8% and the current YTM for a 1-year T-Bond is 0.75%. What is the 5-year term premium if the expected 1-year rates for thenext 4 years are 1.25%, 1.75%, 2.5%, and 3.25%?

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Step 1

the current YTM without term premium should be = (1.0075*1.0125*1.0175*1.025*1.0325)1/5 - 1  

the current YTM without term premium should be = 1.896%

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