The real risk-free rate of interest, r*, is 3%, and it is expectedto remain constant over time. Inflation is expected to be 2% per year for the next 3 years and4% per year for the next 5 years. The maturity risk premium is equal to 0.1 x (t - 1)%, wheret 5 the bond’s maturity. The default risk premium for a BBB-rated bond is 1.3%.a. What is the average expected inflation rate over the next 4 years?b. What is the yield on a 4-year Treasury bond?c. What is the yield on a 4-year BBB-rated corporate bond with a liquidity premium of 0.5%?d. What is the yield on an 8-year Treasury bond?e. What is the yield on an 8-year BBB-rated corporate bond with a liquidity premium of 0.5%?f. If the yield on a 9-year Treasury bond is 7.3%, what does that imply about expectedinflation in 9 years?
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 5 the bond’s maturity. The default risk premium for a BBB-rated bond is 1.3%.
a. What is the average expected inflation rate over the next 4 years?
b. What is the yield on a 4-year Treasury bond?
c. What is the yield on a 4-year BBB-rated corporate bond with a liquidity premium of 0.5%?
d. What is the yield on an 8-year Treasury bond?
e. What is the yield on an 8-year BBB-rated corporate bond with a liquidity premium of 0.5%?
f. If the yield on a 9-year Treasury bond is 7.3%, what does that imply about expected
inflation in 9 years?
Trending now
This is a popular solution!
Step by step
Solved in 5 steps with 3 images
