Question
Suppose the inflation rate is expected to be 7% next year, 6% the following year, and 4% thereafter. Assume that the real risk-free rate, r*,
Suppose the inflation rate is expected to be 7% next year, 6% the following year, and 4% thereafter. Assume that the real risk-free rate, r*, will remain at 2% and that maturity risk premiums on Treasury securities rise from zero on very short-term bonds (those that mature in a few days) to 0.2% for 1-year securities. Furthermore, maturity risk premiums increase 0.2% for each year to maturity, up to a limit of 1.0% on 5-year or longer-term T-bonds. Calculate the interest rate on 1-, 2-, 3-, 4-, 5-, 10-, and 20-year Treasury securities. Round your answers to two decimal places. Treasury securities Interest rate 1-year % 2-year % 3-year % 4-year % 5-year % 10-year % 20-year %
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