Suppose the inflation rate is expected to be 6.75% next year, 4.3% the following year, and 2.3% thereafter. Assume that the real risk-free rate, r*, will remain at 1.85% and that maturity risk premiums on Treasury securities rise from zero on very short-term bonds (those that mature in a few days) to 0.2% for 1-year securities. Furthermore, maturity risk premiums increase 0.2% for each year to maturity, up to a limit of 1.0% on 5-year or longer-term T-bonds. Calculate the interest rate on 3-year Treasury securities.
Suppose the inflation rate is expected to be 6.75% next year, 4.3% the following year, and 2.3% thereafter. Assume that the real risk-free rate, r*, will remain at 1.85% and that maturity risk premiums on Treasury securities rise from zero on very short-term bonds (those that mature in a few days) to 0.2% for 1-year securities. Furthermore, maturity risk premiums increase 0.2% for each year to maturity, up to a limit of 1.0% on 5-year or longer-term T-bonds.
Calculate the interest rate on 3-year Treasury securities.
The nominal interest rate is the rate that the market shows as the one that the security provides. The real interest rate is the rate that the security earns after the effect of inflation is taken into consideration.
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