The real risk-free rate of interest, r*, is 4 percent, and it is expected to remain constant over time.  Inflation is expected to be  2 percent per year for the next three years, after which time inflation is expected to remain at a constant rate of 5 percent per year.  The maturity risk premium is equal to 0.1(t - 1)%, where t = the bond’s maturity.  What is the yield on a 10-year Treasury bond?

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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.