Use the following information to answer the next questions. Suppose the real ris
ID: 2781751 • Letter: U
Question
Use the following information to answer the next questions.
Suppose the real risk-free rate is 3.00%, the average expected future inflation rate is 2.25%, and a maturity risk premium of 0.10% per year to maturity applies, i.e., MRP = 0.10%(t), where t is the number of years to maturity.
The value of MRP needed, but not already provided is
a) MRP = 4 x .10 (expressed in tenths of a percent)
b) MRP = 3 x .10 (expressed in tenths of a percent)
c) MRP = 2 x .10 (expressed in tenths of a percent)
d) MRP = 1 x .10 (expressed in tenths of a percent)
The yield on a 10-year treasury bond would be calculated as rT-bond equals
a) r* + IP + MRP
b) r* + IP + MRP + LP + DRP
c) r* + MRP + LP + DRP
(Enter the appropriate figures) Based on the calculation you selected above, the 1-year yield on a T-bond required is (Two decimals, %: 1.00 or 1.00%)
______________________________ % equals (Two decimals, %: 1.00 or 1.00%)
____________________________ % plus (Two decimals, %: 1.00 or 1.00%)_____________________
% plus (Two decimals, %: 1.00 or 1.00%)________________________%
Explanation / Answer
a) r* + IP + MRP = 3+2.25 + (10X0.1 ) = 6.25%
DRP AND LP Is not mentioned in the sum.
If this answer was helpful , Please leave a thumbs up! If you are unsatisfied with my answer , please leave a note in the comments section and I will try my best to clarify it for you. All the best! Thanks :) Feel free to comment for any clarifications.