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You've just taken a job at in investment banking firm and been given the job of calculating the appropriate nominal interest rate for a number
You've just taken a job at in investment banking firm and been given the job of calculating the appropriate nominal interest rate for a number of different treasury bonds with different maturity dates. The real risk-free interest rate that you have been told to use is 2.5%, and this rate is expected to continue on into the future without any change. Inflation is expected to be constant over the future at a rate of 2.0% since these are bonds that are issued by the U.S Treasury, they do not have any default risk or any liquidy risk (that is, there is no liquidy-risk premium). Maturity risk premium is dependent upon how many years the bond has to maturity. The maturity risk premiums are as follows: |
BOND MATURES IN: | MATURITY-RISK PREMIUM: | |||
0-1 YEARS | 0.05% | |||
1-2 YEARS | 0.30% | |||
2-3 YEARS | 0.60% | |||
3-4 YEARS | 0.09% |
Given this information, what should the nominal rate of interest on treasury bonds maturing in 0-1 year, 1-2 years, 2-3 years, and 3-4 years be? |
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