Question

The real risk-free rate is 2.25%. Inflation is expected to be 2.5% this year and 4.25% during the next 2 years. Assume that the maturity risk premium is zero. What is the yield on 2-year Treasury securities

Answer 1

Answer:

yield on 2 year treasury = 5.63 %

Explanation:

given data

real risk-free rate = 2.25 %

Inflation rate year 1 = 2.5 %

Inflation rate year 2 = 4.25 %

solution

we get here average inflation rate is

average inflation rate = $\frac{2.5+4.25}{2}$   ...........1

average inflation rate = 3.38 %

so here yield on 2 year treasury

yield on 2 year treasury = real risk-free rate + average inflation rate + MRP   ...............2

yield on 2 year treasury = 2.25 % + 3.38 % + 0%

yield on 2 year treasury = 5.63 %