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    Yield on two and three year treasury securities

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    The real risk free rate of interest is 3%. Inflation is expected to be 2% this year and 4 percent during the next two years. Assume that the maturity risk premium is zero. What is the yield on a two year treasury security? What is the yield on a 3 year treasury security?

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    Solution Preview

    The real risk free rate of interest is 3%.  Inflation is expected to be 2% this year and 4 percent during the next two years.  Assume that the maturity risk premium is zero.  What is the yield on a two year treasury security?  What is the yield on a 3 year treasury security?

    Since treasury securities do not have liquidity and default risk and the maturity risk ...

    Solution Summary

    Yield on 2 year and 3 year treasury securities are calculated, given real risk free rate of interest, inflation and maturity risk premium. The solution is provided in steps to ensure student understanding.

    $2.19

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