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The real risk-free rate of interest, k*, is 4 percent, and it is expected to remain constant over time. Inflation is expected to be 2 percent per year for the next four years, after which time inflation is expected to remain at a constant rate of 5 percent per year. The maturity risk premium is 0% for securities with maturities of 1 year or less, 0.1% in year 2, and increases by 0.1% per year thereafter. What is the yield on a 10-year Treasury bond

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batolisis

Answer:

8.3%

Explanation:

Real risk - free rate of interest ( k* ) = 4%

Inflation for next four ( 4 ) years = 2% per year

Inflation rate after four years = 5%

maturity risk premium =  0.1 ( t - 1 )%

Determine Yield on a 10-year Treasury bond

t = bond's maturity

Yield = Real risk - free rate + maturity risk premium + inflation rate

Inflation rate for 10 years = ( 4  + 30 ) / 10  ) % = 3.4%

Yield = 4% + 0.1(10- 1)% + 3.4

         = 4% + 0.9% + 3.4%

         = 8.3%

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