Problem 4 Intro 1-year T-bills yield 4.5% and 2-year Treasury notes yield 8.5%. The real risk-free rate of interest is

Question

Problem 4 Intro 1-year T-bills yield 4.5% and 2-year Treasury notes yield 8.5%. The real risk-free rate of interest is 3.5% and expected to stay constant, while the maturity risk premium is zero. Part 1 1 | Attempt 1/18 for 10 pts. Using the expectations theory, what is the yield on a 1-year risk-free bond, one year from now? 3+ decimals Submit | Attempt 1/18 for 10 pts. Part 2 What is the expected inflation rate in Year 1? 4+ decimals Submit Attempt 1/18 for 10 pts. Part 3 What is the expected inflation rate in Year 2? 3+ decimals Submit

Help In Homework · Accepted Answer

Part 1 one year T bill rate = 4.5% Two year T bill rate = 8.5% 1 year yield 1 year from today = (1 + two year)^2) / ((1+ one year rate) - 1 = (1 + 8.5%)^2) / ((1+ 4.5%) - 1 = (1.177225/1.045) - 1 = 12.65% 1 year yield 1 year from today = 12.65% Part 2 Nominal Rate for 1 year = 4.5% Real Risk free rate = 3.5% Expected inflation = Nominal rate - real rate = 4.5% - 3.5% Expected inflation in year 1= 1% Part 3 Nominal Rate for 1 year from 1 year(basically for 2nd year)= 12.65% (derived in part 1) Real Risk free rate = 3.5% Expected inflation = Nominal rate - real rate = 12.65% - 3.5% Expected inflation in year 2= 9.15%

Why Choose Us?

0% AI Guarantee

24/7 Support

Plagiarism Free

Expert Tutors

100% Confidential

On-Time Delivery

Problem 4 Intro 1-year T-bills yield 4

Expert Solution

Archived Solution

Part 1
one year T bill rate = 4.5%
Two year T bill rate = 8.5%

1 year yield 1 year from today = (1 + two year)^2) / ((1+ one year rate) - 1
				= (1 + 8.5%)^2) / ((1+ 4.5%) - 1
				= (1.177225/1.045) - 1
				= 12.65%

1 year yield 1 year from today = 12.65%

Part 2
Nominal Rate for 1 year = 4.5%
Real Risk free rate = 3.5%

Expected inflation = Nominal rate - real rate = 4.5% - 3.5%
Expected inflation in year 1= 1%

Part 3
Nominal Rate for 1 year from 1 year(basically for 2nd year)= 12.65% (derived in part 1)
Real Risk free rate = 3.5%

Expected inflation = Nominal rate - real rate = 12.65% - 3.5%
Expected inflation in year 2= 9.15%