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    Calculating Interest Rates

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    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?

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    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.

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