hw5

(1) The real risk free rate of interest is 3 % (k*). Inflation is expected to be 4% next year, 5 % the following year and 6% the year after. What should the ROR (k) be for a 3-year risk free security?

(2) Inflation is expected to be 2% for the next three years, then 5% for the next 7 years. What should the Inflation Premium be for a ten-year security?

(3) The real risk free rate if interest is 4% (k*), Inflation Premium expected for the next 10 years is 3 % and the Maturity Risk Premium is equal to 0.1(t-1)% where t is equal to a securitys maturity in years. What should the yield (k) be on a 10 year Treasury Bond?

4) Suppose the real risk-free rate is 3.50% (k*), the average future inflation rate is 2.25%, and a maturity risk premium of 0.10% per year to maturity applies, i.e. MRP = 0.10(t)% where t is the years to maturity. What rate of return (k) would you expect on a 5-year Treasury security?