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The real risk-free rate is 2.00%. Inflation is expected to be 2.50% this year and 4.00%...

The real risk-free rate is 2.00%. Inflation is expected to be 2.50% this year and 4.00% during the next 2 years. Assume that the maturity risk premium is zero. What is the yield on 2-year Treasury securities? Do not round intermediate calculations. Round your answer to two decimal places. % What is the yield on 3-year Treasury securities? Do not round intermediate calculations. Round your answer to two decimal places. %

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Answer #1

The yield on the 2 -year treasury security is :

= Rf + inflation premium + maturity risk premium

= 2% + (2.5% + 4%) / 2 + 0

= 5.25%

The yield on the 3 year treasury security is:

= 2% + (2.5% + 4 % + 4%) / 3 + 0

= 5.5%

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