assume that the real risk-free rate of return is 3% and it will remain at that l
ID: 2681707 • Letter: A
Question
assume that the real risk-free rate of return is 3% and it will remain at that level far into the future. Also assume that maturity risk premiums on Treasury bonds increase from zero for bonds that mature in one year or less to a maximum of 2 percent, and MRP incresaes by .2% for each year to maturity that is greater than 1 year- that is, MRP equals .2% for a 2 year bond, .4% for a 3-year bond and so forth. Following are the expected inflation rates for the next 5 years..... 2009-3% 2010-5% 2011-4% 2012-8% 2013-3%................. A. what is the average expected inflation rate for a one-, two-, three-, four-, and five year bond?............B. what should be the MRP for a 1, 2, 3, 4, and 5 year bond?................C. compute the interest rate for a 1, 2, 3, 4, and 5 year bond...............D. if inflation is expected to equal 2% every year after 2013, what should the interest rate be for a 10- and 20- year bond?...................E. plot the yield curve for the interest rates you computed in parts C and D-------------------
Please help me to understand how to work this problem out and solve it!
Explanation / Answer
A. .4% B. .2% , .4% , .6% ,.7% ,.8% C. 3% ,5%,4%,8%,3% respectively D. 2% and 4% respectively
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