Share
Explore BrainMass

Calculating Interest Rates

Investors expect the inflation rate to be 7% next year, to fall to 5% during the following year, and then to remain at a rate of 3% 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 securities to a level of .2% for 1-year securities. Furthermore, maturity risk premiums increase .2% for each year to maturity, up to a limit of 1% on 5-year or longer term T-notes and T-bonds.

QUESTION:
How do I utilize this information to calculate the interest rates on 1-, 2-, 3-, 4-, 5-, 10-, and 20-year Treasury securities?

Solution Preview

Investors expect the inflation rate to be 7% next year, to fall to 5% during the following year, and then to remain at a rate of 3% thereafter. Assume that the real risk free rate, r*, will remain at 2% and that maturity risk premiums on ...

Solution Summary

This solution is comprised of a detailed explanation to answer how to utilize this information to calculate the interest rates on 1-, 2-, 3-, 4-, 5-, 10-, and 20-year Treasury securities.

$2.19