Suppose the real risk-free rate of interest is r* = 4% and it is expected to remain constant over time. Inflation is expected to be 1.60% per yearfor the next 3 years and 3.90% per year for the next 5 years. The maturity risk premium is 0.1 × (t − 1)%, where t is number of years tomaturity, a liquidity premium is 0.45%, and the default risk premium for a corporate bond is 1.40%.Complete the following table by calculating yields on Treasury and corporate bonds of various maturity.The yield on a 4-year Treasury bondThe yield on a 4-year corporate bondThe yield on a 8-year Treasury bondThe yield on a 8-year corporate bondExpected inflation in 9 years, if the yield on a 9-year Treasury bond is 8.07%Value▶ If the yield on a 5-year Treasury bond is 7.38% and the yield on a 6-year Treasury bond is 7.83%, the expected inflation in 6 years is(Hint: Do not round intermediate calculations.)

The yield on a 4-year Treasury bond The yield on a 4-year corporate bond The yield on a 8-year Treasury bond The yield on a 8-year corporate bond Expected inflation in 9 years, if the yield on a 9-year Treasury bond is 8.07% 1111

The yield on a 4-year Treasury bond The yield on a 4-year corporate bond The yield on a 8-year Treasury bond The yield on a 8-year corporate bond Expected inflation in 9 years, if the yield on a 9-year Treasury bond is 8.07% 1111

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Suppose the real risk-free rate of interest is r* = 4% and it is expected to remain constant over time. Inflation is expected to be 1.60% per year
for the next 3 years and 3.90% per year for the next 5 years. The maturity risk premium is 0.1 × (t − 1)%, where t is number of years to
maturity, a liquidity premium is 0.45%, and the default risk premium for a corporate bond is 1.40%.
Complete the following table by calculating yields on Treasury and corporate bonds of various maturity.
The yield on a 4-year Treasury bond
The yield on a 4-year corporate bond
The yield on a 8-year Treasury bond
The yield on a 8-year corporate bond
Expected inflation in 9 years, if the yield on a 9-year Treasury bond is 8.07%
Value
▶

If the yield on a 5-year Treasury bond is 7.38% and the yield on a 6-year Treasury bond is 7.83%, the expected inflation in 6 years is
(Hint: Do not round intermediate calculations.)

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