The real risk-free rate of interest, r*, is 3%, and it is expected to remain constant over time. Inflation is expected to be 2% per year for the next 3 years and 4% per year for the next 5 years. The maturity risk premium is equal to 0.1 X (t - 1)%, where t = the bond’s maturity. The default risk premium for a BBB-rated bond is 1.3%.   What is the yield on an 8-year Treasury bond? What is the yield on an 8-year BBB-rated corporate bond with a liquidity premium of 0.5%? If the yield on a 9-year Treasury bond is 7.3%, what does that imply about expected inflation in 9 years?

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Interest Rate

When you deposit your money with the bank, the deposit earns you some extra money at the end of the specific period – something more than what you deposited. That amount of money that the bank pays you for keeping the money with the bank is the “interest” and the percentage at which the bank pays you for your amount is called the “interest rate”.