# Yield on a Treasury Bond

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?

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#### Solution Preview

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 ...

#### Solution Summary

The solution calculates yield on a treasury bond that matures in 12 years given inflation, maturity risk premium and real risk-free rate of interest.