Question

Suppose the rate of return on a 10-year T-bond is 6.90%, the expected average rate of inflation over the next 10 years is 2.0%, the MRP on a 10-year T-bond is 0.9%, no MRP is required on a TIPS, and no liquidity premium is required on any Treasury security. Given this information, what should the yield be on a 10-year TIPS? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average. a. 4.60% b. 4.00% c. 3.04% d. 4.76% e. 3.92%

Answer 1

Answer:

correct option is b. 4.00%

Explanation:

given data

10 Year T-bond yield  = 6.90 %

Inflation   = 2 %

MRP of 10 years T-bond  = 0.90

to find out

Treasury Inflation Protected Securities  (TIPS)

solution

we get Treasury Inflation Protected Securities yield is express as

Treasury Inflation Protected Securities yield = T bond yield -  Inflation- MRP   ................1

so

Treasury Inflation Protected Securities yield = 6.90 - 2 - 0.90

Treasury Inflation Protected Securities yield  = 4 %

so correct option is b. 4.00%