Homework Answers
For a Treasury security,
Nominal Yield = Real risk free rate + Inflation premium + Maturity risk premium
Inflation premium is average of inflation over life of bond = [3.05% + 4.05% + (5 * 2.1%)]/7 = 2.51%
Maturity risk premium = 0.05 * (7 -1)% = 0.30%
Nominal yield = 3.3% + 2.51% + 0.30%
Nominal yield = 6.11%
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