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Yield on T-Bond

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The market expects that inflation will be 3% percent each year for the next 5 years and then the following years will average 5% percent a year.
The maturity risk premium is estimated to be MRPt = 0.1(t - 1)%.
Maturity risk premium on a two year security is 0.1 percent or 0.001.
Real risk-free rate of interest is 3%.
What is the yield on a Treasury bond that matures in 12 years?

a. 8.10%
b. 8.27%
c. 8.45%
d. 8.53%
e. 8.68%

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Solution Summary

The solution explains how to calculate the yield on a Treasury Bond given the various components of the total risk

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