Homework Answers
Answer a.
Real Risk-free Rate = 3.50%
Inflation Premium = Average of Inflation over 2 years
Inflation Premium = (2.00% + 4.75%) / 2
Inflation Premium = 6.75% / 2
Inflation Premium = 3.38%
Yield on 2-year Treasury Note = Real Risk-free Rate + Inflation
Premium + Maturity Risk Premium
Yield on 2-year Treasury Note = 3.50% + 3.38% + 0.00%
Yield on 2-year Treasury Note = 6.88%
Answer b.
Real Risk-free Rate = 3.50%
Inflation Premium = Average of Inflation over 3 years
Inflation Premium = (2.00% + 4.75% + 4.75%) / 3
Inflation Premium = 11.50% / 3
Inflation Premium = 3.83%
Yield on 3-year Treasury Note = Real Risk-free Rate + Inflation
Premium + Maturity Risk Premium
Yield on 3-year Treasury Note = 3.50% + 3.83% + 0.00%
Yield on 3-year Treasury Note = 7.33%
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