Suppose the real risk-free rate is 4.20%, the average expected future inflation rate is 2.50%, and a maturity risk premium of 0.10% per year to maturity applies, I.E MRP-0.10%(t), where t is the number of years to maturity. What rate of return would you expect on a 4 year Treasury Security?
For a Treasury Security,
Nominal Yield = Real risk free rate + Inflation premium + Maturity risk premium
Maturity risk premium for a 4 yr bond = 0.10%* 4 = 0.40%
Nominal Yield for bond = 4.20% + 2.50% + 0.40%
Nominal yield = 7.10%
Suppose the real risk-free rate is 4.20%, the average expected future inflation rate is 2.50%, and a maturity risk premi...
Suppose the real risk-free rate is 4.20%, the average expected future inflation rate is 4.20%, and a maturity risk premium of 0.10% per year to maturity applies, i.e., MRP = 0.10%(t), where t is the number of years to maturity. What rate of return would you expect on a 4-year Treasury security? Disregard cross-product terms. a. 8.54% b. 8.80% c. 8.01% d. 7.92% e. 7.22%
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