Question

The real risk-free rate is 3%. inflation is expected to be 2% this year and 4%...

The real risk-free rate is 3%. inflation is expected to be 2% this year and 4% during the next 2 years. Assume the maturity risk premium is zero.
a) what is the yield on 2 year Treasury securities?

b) what is the yield on 3 year Treasury securities?
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Answer #1
2 year yield = Real risk free rate + (IP1+IP2)/2
=3+(2+4)/2
=6%
3 year yield = Real risk free rate + (IP1+IP2+IP3)/3
=3+(2+4+4)/3
=6.33%
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