Question

5.The real risk-free rate of interest is 2%. Inflation is expected to be 3.5% the next 2 years and 6% during the next 3 years after that. Assume that the maturity risk premium is zero. What is the yield on 3-year Treasury securities

Answer 1

Answer:

17.50%

Explanation:

The computation of the yield on 3 year treasury securities is shown below:

The Yield on 3 year is

= Risk free rate of return   +  Inflation premium + Market risk premium

= 2% + (3.5% + 6% + 6%) ÷ 3 years + 0

= 2% + 15.5% + 0

= 17.50%

Hence, the yield on 3 years is 17.50% by applying the above formulas by considering the given information