Question

Suppose the rate of return on a 10-year T-bond is 4.05%, the expected average rate of inflation over the next 10 years is 2.0%, the MRP on a 10-year T-bond is 0.9%, no MRP is required on a TIPS, and no liquidity premium is required on any Treasury security. Given this information, what should the yield be on a 10-year TIPS? Di

Answer 1

Answer:

1.15%.

Explanation:

This can be calculated as follows:

Yield be on a 10-year TIPS = Rate of return on the 10 year T-bond - Average Inflation - Market Risk Premium (MRP)

Therefore, we have:

Yield be on a 10-year TIPS = 4.05% - 2.0% - 0.9% = 1.15%

Therefore, the yield on a 10-year TIPS should be 1.15%.