A 30-year U.S. Treasury bond has a 4.0 percent interest rate. In contrast, a 10-year Treasury note has an interest rate of 2.5 percent. A maturity risk premium is estimated to be 0.2 percentage points for the longer maturity bond. Investors expect inflation to average 1.5 percentage points over the next 10 years. a) Estimate the expected real rate of return on the 10-year U.S. Treasury note. b) If the real rate of return is expected to be the same for the 30-year bond as for the 10-year note, estimate the average annual inflation rate expected by investors over the life of the 30-year bond.
A 30-year U.S. Treasury bond has a 4.0 percent interest rate. In contrast, a 10-year Treasury note has an interest rate of 2.5 percent. A maturity risk premium is estimated to be 0.2 percentage points for the longer maturity bond. Investors expect inflation to average 1.5 percentage points over the next 10 years. a) Estimate the expected real rate of return on the 10-year U.S. Treasury note. b) If the real rate of return is expected to be the same for the 30-year bond as for the 10-year note, estimate the average annual inflation rate expected by investors over the life of the 30-year bond.
Chapter5: The Cost Of Money (interest Rates)
Section: Chapter Questions
Problem 13PROB
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20- A 30-year U.S. Treasury bond has a 4.0 percent interest rate. In contrast, a 10-year Treasury note has an interest rate of 2.5 percent. A maturity risk premium is estimated to be 0.2 percentage points for the longer maturity bond. Investors expect inflation to average 1.5 percentage points over the next 10 years.
a) Estimate the expected real
b) If the real rate of return is expected to be the same for the 30-year bond as for the 10-year note, estimate the average annual inflation rate expected by investors over the life of the 30-year bond.
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