The real risk-free rate of interest is 4%. Inflation is expected to be 3% this year and 4% during each of the next 3 years. Assume that the maturity risk premium is zero. XYZ company's bonds are rated BB and accordingly the spread is estimated to be 2.6%. What is the yield on a 2-year Treasury security and a 4-yr Treasury security? What is the yield on a 2-year bond of XYZ and a 4-yr bond of XYZ?

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Treasury Market

On-the-run securities are the most recently issued securities in the market depth and are therefore traded at some premium. The off-the-run securities are the ones issued just before the most recent ones. The on-the-run securities have a lower yield to the investor than the off-the-run securities.