Question

The real risk-free rate is 2.5% and inflation is expected to be MATURITY RISK PREMIUM 2.75% for the next 2 years. A 2-year Treasury security yields 5.55%. What is the maturity risk premium for the 2-year security? 65 6-6 INFLATION CROSS-PRODUCT An analyst is evaluating securities in a developing nation where the inflation rate is very high. As a result, the analyst has been warned not to ignore the cross-product between the real rate and inflation. If the real risk-free rate is 5% and inflation is expected to be 18% each of the next 4 years, what is the yield on a 4-year security with no maturity, default, or liquidity risk? (Hint: Refer to "The Links between Expected tion and Interest Rates: A Closer Look" on page 206.) 6-7 One-year Treasury securities yield 4.85%. The market anticipates EXPECTATIONS THEORY that 1 year from now, 1-year Treasury securities will yield 5.2%. If the pure expectations theory is correct, what is the yield today for 2-year Treasury securities? Calculate the yield using a geometric average. EXPECTATIONS THEORY while 6-year Treasury securities yield 7.25%. If the pure expectations theory is correct, what does the market believe that 2-year securities will be yielding 4 years from now? Calculate the yield using a geometric average EXPECTED INTEREST RATE The real risk-free rate is 2.05%. Inflation is expected to be 305% this year, 4.75%, next year,and23% thereafter. The maturity risk premium termediate 68 Interest rates on 4-year Treasury securities are currently 6.7%, -16 69

Answer 1

Let the Yield for 2 year treasury securities be Y.

(1 + Y)^2 = (1 + 0.0485) * (1 + 0.052)

(1 + Y)^2 = 1.0485 * 1.052

(1 + Y)^2 = 1.103022

*Take the square root of both sides to get rid of square on left hand side

​​​​(1 + Y) = 1.05025

Y = 1.05025 - 1

Y = 0.05025 i.e., 5.025 % (approx)

Conclusion:- Yield for two year treasury securities today = 5.025 % (approx).

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