Question
1, The real risk-free rate is 2%. Inflation is expected to be 3% this year, 5% next year, and then 3.5% thereafter. The maturity risk
1, The real risk-free rate is 2%. Inflation is expected to be 3% this year, 5% next year, and then 3.5% thereafter. The maturity risk premium is estimated to be 0.0003 (t - 1), where t = number of years to maturity. What is the nominal interest rate on a 7-year Treasury security? Do not round intermediate calculations. Round your answer to two decimal places.
2, Assume that the real risk-free rate, r*, is 2% and that inflation is expected to be 7% in Year 1, 6% in Year 2, and 2% thereafter. Assume also that all Treasury securities are highly liquid and free of default risk. If 2-year and 5-year Treasury notes both yield 10%, what is the difference in the maturity risk premiums (MRPs) on the two notes; that is, what is MRP5 minus MRP2? Round your answer to one decimal place.
3, Because of a recession, the inflation rate expected for the coming year is only 2%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 2%. Assume that the real risk-free rate is r* = 2% for all maturities and that there are no maturity risk premiums. If 3-year Treasury notes yield 2 percentage points more than 1-year notes, what inflation rate is expected after Year 1? Round your answer to the nearest whole number.
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