Question

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

Answer 1

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%