Suppose the following bond rates: What is the rate on a 2-year bond, 1 year from

Question

Suppose the following bond rates: What is the rate on a 2-year bond, 1 year from today?) 8.30% What is the rate on a 3-year bond, 4 year from today? 10.02% What is the rate on a 6-year bond, 6 year from today? 10.70% What is the rate on a 2-year bond, 16 year from today? 13.68% What is the DRP of 10-y bond that has a 6 0% return if the inflation premium is. 0.5%, the maturity risk premium is 0.4% and the liquidity premium is 1.1%? T-bills are currently returning 3.1%. given this information, what would the return on a 10-y T-bond? What is the real risk-free rate? DRP = 1.4% T-bond r = 3.5% DRP = 2.7%

Explanation / Answer

1)

where Y1,y2,y3 is the YTM of the respective years

a)The formule used is
[[(1+y3)^3/(1+Y1)^1]^(1/2)]-1
=[[(1+8.2%)^2/(1+8%)^1](1/3)]-1
=8.3%

b)The formule used is
[[(1+y7)^7/(1+Y4)^4]^(1/3)]-1
=[[(1+9.15%)^2/(1+8.5%)^1](1/3)]-1
=10.02%

c)The formule used is
[[(1+y12)^12/(1+Y6)^6]^(1/6)]-1
=[[(1+9.77%)^2/(1+8.85%)^1](1/6)]-1
=10.7%

d)The formule used is
[[(1+y18)^18/(1+Y16)^16]^(1/2)]-1
=[[(1+11.25%)^18/(1+10.95%)^16](1/2)]-1
=13.68%

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