Expected interest rate calculation- Treasury Bonds | FIN-Ed

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Expected interest rate calculation- Treasury Bonds | FIN-Ed

Hi, In this video, we will show how the expected interest rate is calculated. We know that the quoted or nominal interest rate on a debt security is composed of a real risk-free rate, plus several premiums that reflect inflation risk, default risk, liquidity risk, and maturity risk.

Example:
The real risk-free rate is 2.25%. Inflation is expected to be 2.5% this year and 4.25% during the next 2 years. Assume that the maturity risk premium is zero. What is the yield on 2-year Treasury securities? What is the yield on 3-year Treasury securities?

Source: Fundamentals of Financial Management (Concise Edition) Brigham and Houston
Chapter 6: Interest Rates
Problem: 6-3

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