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blondinia [14]
3 years ago
7

Assume that the real risk-free rate is 2% and that the maturity risk premium is zero. If a 1-year Treasury bond yield is 7% and

a 2-year Treasury bond yields 8%, what is the 1-year interest rate that is expected for Year 2
Business
1 answer:
Alex Ar [27]3 years ago
3 0

Answer:

interest rate =  9.01%

Explanation:

given data

real risk-free rate = 2%

maturity risk premium =  zero

year 1 Treasury bond yield r1 = 7%

year 2 Treasury bond yield r2 = 8%

solution

we get here year 1 interest rate expected for year 2 is that is express as

interest rate = \frac{(1+r2)^2}{(1+r1)} -1  

interest rate = \frac{(1+0.08)^2}{(1+0.07)} -1

interest rate = 1.090093 - 1  

interest rate =  9.01%

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