Question

Assume that the real risk-free rate is 0.5% and that the maturity risk premium is zero. A 1-year Treasury bond yield is 32% and a 2-year Treasury bond yields 34%. a) What is the 1-year interest rate that is expected for Year 2? b) What inflation rate is expected during Year 2? O a) 36.03%; b) 35.53% a) 36.03%; b) 35.03% a) 37.03%; b) 35.53% O a) 35.53%; b) 36.03% O a) 36.53%; b) 36.53%

Answer 1

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? 1x ENG 0427 24-02-2020 24 P897 O P Q R S T U V W X Y 879 880 881 882 YIELD ON 2 YEAR TREASURY BOND YIELD ON 1 YEAR TREASURY BOND 34.00% 1R2 32.00% 1R1 883 884 1 YEAR RATES 1 YEAR FROM NOW = 2f1 885 886 2f1 = (1+1R2)^2/(1+1R1)^1-1 = ((1+0.34)^2/(1+0.32)-1) -1 = 36.03% 887 888 889 890 891 EXPECTED INFLATION RATE IN YEAR 2 RATE OF INTEREST IN YEAR 2 = 36.03% = IP = p*+ IP 0.5% + IP 892 35.53% 893 894 ANSWER: (a): 36.03%, 35.53% 895 896 897 898 899 900 901 902 YIELD SPOT AFN BANKING NOTE Sheet2 51 53 CLEAN PRICE S10 BIDDING, UNDERWRITING EUAC AW LIFE LP, IP, MRP, INFLATION WARR... : )