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On Feb 14th, an analyst evaluating securities base on following information. The real risk-free rate is 3% and is expected to be constant for next
On Feb 14th, an analyst evaluating securities base on following information. The real risk-free rate is 3% and is expected to be constant for next 30 years. Inflation is expected to be 5% next year, 6% the following year, and 8% thereafter. The maturity risk premium is estimated to be 0.7*(t-1%, where t = number of years to maturity. The liquidity premium on relevant 3-year security is 0.25% and the default risk premium on relevant 3- year security is 0.6%. Question): Constructing the Yield Curve (LY. 3. 10. 20Y) for Treasury. Step: 0. Pre-calculation -- Identify the components of nominal rater first: 1. Identify the real risk-free rate r*: 2. Find the IP (average expected inflation rate) over Years 1 to N: MaturityE(Inflation rate)IP, 1 3 10 20 3. Find the appropriate MRP: IP MRP IT=r* + IP+ MRP 4. Adding the premiums to r*: Maturity (r*) 1 3 10 20 5. Plot ther with different maturity: On Feb 14th, an analyst evaluating securities base on following information. The real risk-free rate is 3% and is expected to be constant for next 30 years. Inflation is expected to be 5% next year, 6% the following year, and 8% thereafter. The maturity risk premium is estimated to be 0.7*(t-1%, where t = number of years to maturity. The liquidity premium on relevant 3-year security is 0.25% and the default risk premium on relevant 3- year security is 0.6%. Question): Constructing the Yield Curve (LY. 3. 10. 20Y) for Treasury. Step: 0. Pre-calculation -- Identify the components of nominal rater first: 1. Identify the real risk-free rate r*: 2. Find the IP (average expected inflation rate) over Years 1 to N: MaturityE(Inflation rate)IP, 1 3 10 20 3. Find the appropriate MRP: IP MRP IT=r* + IP+ MRP 4. Adding the premiums to r*: Maturity (r*) 1 3 10 20 5. Plot ther with different maturity
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