Question

Can anybody tell me how to solve this?
The real risk free rate is 2%. The inflation premium for the next three years is 4.0%. The maturity risk premium for three year bonds is 3.7%. Liquidity premium is 3% and default risk premium is 3.5%. What is the nominal rate on a three year Treasury Bond?

answer in % without the symbol

Answer 1

The nominal rate on a three year Treasury Bond, which is the risk-free rate plus the inflation premium, is 6%.

What are nominal rates?

The nominal interest rate (also known as the money interest rate) is the percentage of interest that the borrower pays to the lender for a loan.

The nominal interest rate includes the real rate and the inflation premium.

Data and Calculations:

Risk-free rate = 2%

Inflation premium = 4.0%

Maturity risk premium = 3.7%

Liquidity premium = 3%

Default risk premium = 3.5%

Nominal rate for Treasury Bond = Risk-free rate plus Inflation premium

= 6% (2% + 4%)

Thus, the nominal rate on a three year Treasury Bond is 6%.

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