The real risk-free rate is 3 percent. Inflation is expected to be 4 percent this year, 5.5 percent next year, and 6.5 percent thereafter. The maturity risk premium is estimated to be 0.13' (t- 1)%, where t is the number of years to maturity. What is the yield on a 6-year Treasury note?

The real risk-free rate is 3 percent. Inflation is expected to be 4 percent this year, 5.5 percent next year, and 6.5 percent thereafter. The maturity risk premium is estimated to be 0.13' (t- 1)%, where t is the number of years to maturity. What is the yield on a 6-year Treasury note?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 10P

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Concept explainers

Treasury Market

On-the-run securities are the most recently issued securities in the market depth and are therefore traded at some premium. The off-the-run securities are the ones issued just before the most recent ones. The on-the-run securities have a lower yield to the investor than the off-the-run securities.

Question

The real risk-free rate is 3 percent.
Inflation is expected to be 4 percent
this year, 5.5 percent next year, and 6.5
percent thereafter. The maturity risk
premium is estimated to be 0.13' (t-
1)%, where t is the number of years to
maturity. What is the yield on a 6-year
Treasury note?

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