Explanation Solution: In order to compute the expected inflation after a year; 1-year Treasury bond yield, 3-year treasury bonds yield, 2-year treasury bonds yield need to calculate. Compute the 1-year Treasury bond yield Given, Real risk-free rate is 2%. The one year inflation rate is 3%. Formula to calculate the 1-year Treasury bond, Yield of 1-year Treasury Bond = r* + IP Where, r* is real risk-free rate. IP for inflation premium. Substitute 2% for r* and 3% for IP. Yield of 1-year Treasury Bond = 2 % + 3 % = 5 % The yield of 1-year Treasury bond is 5%. Compute the 3-year Treasury bond yield The yield of 1-year Treasury bond is 5%. (Calculated) The additional yield of 3-year Treasury bond than 1-year Treasury bond is 2%. Formula to calculate the 3-year Treasury bond, Yield of 3-year Treasury Bond = Yield of 1-year Treasury Bond + More Yield Substitute 5% for yield of 1-year Treasury bond and 2% for more yield. Yield of 3-year Treasury Bond = 5 % + 2 % = 7 % The yield of 3-year Treasury bond is 7%. Compute the 2-year treasury bonds yield Calculated, The yield of 1-year Treasury bond is 5% or 0.05. The yield of 3-year Treasury bond is 7% or 0.07

Fundamentals of Financial Management (MindTap Course List)

14th Edition

ISBN: 9781285867977

Author: Eugene F. Brigham, Joel F. Houston

Publisher: Cengage Learning

See similar textbooks

Concept explainers

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…

Question

Chapter 6, Problem 10P

Summary Introduction

To identify: The expected inflation rate after a year.

Expectation Theory:

Expectation theory estimates the future interest without taking maturity risk into consideration. According to the expectation theory, the yield curve of investment totally depends upon the future expectation of investors.

Expert Solution & Answer

Chapter 6 Solutions

Fundamentals of Financial Management (MindTap Course List)

Ch. 6 - Prob. 1Q Ch. 6 - Prob. 2Q Ch. 6 - Suppose you believe that the economy is just...Ch. 6 - Prob. 4Q Ch. 6 - Suppose a new process was developed that could be...Ch. 6 - Prob. 6Q Ch. 6 - Prob. 7Q Ch. 6 - Suppose interest rates on Treasury bonds rose from...Ch. 6 - Prob. 9Q Ch. 6 - Suppose you have noticed that the slope of the...

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

Determinant of Interest Rates The real risk-free rate of interest is 4%. Inflation is expected to be 2% this year and 4% during each of the next 2 years. Assume that the maturity risk premium is zero. What is the yield on 2-year Treasury securities? What is the yield on 3-year Treasury securities?

Recommended textbooks for you

Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT

Intermediate Financial Management (MindTap Course...

Finance

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Cengage Learning

EBK CONTEMPORARY FINANCIAL MANAGEMENT

Finance

ISBN:9781337514835

Author:MOYER

Publisher:CENGAGE LEARNING - CONSIGNMENT

SEE MORE TEXTBOOKS

The expected inflation rate after a year. Expectation Theory: Expectation theory estimates the future interest without taking maturity risk into consideration. According to the expectation theory, the yield curve of investment totally depends upon the future expectation of investors.

Solution Summary: The author explains the expected inflation rate after a year. Expectation theory estimates the future interest without taking maturity risk into consideration.

Concept explainers

To identify: The expected inflation rate after a year. Expectation Theory: Expectation theory estimates the future interest without taking maturity risk into consideration. According to the expectation theory, the yield curve of investment totally depends upon the future expectation of investors.

Chapter 6 Solutions

To identify: The expected inflation rate after a year.

Expectation Theory:

Expectation theory estimates the future interest without taking maturity risk into consideration. According to the expectation theory, the yield curve of investment totally depends upon the future expectation of investors.