P5. A thirty U.S. Treasury bond has a 4.0 percent interest rate. In contrast, a ten-year Treasury bond has an interest rate of 2.5 percent. A maturity risk premium is estimated to be .2 percentage points for the longer maturity bond. Investors expect inflation to average 1.5 percentage points over the next ten years.

Question

a. Estimate the expected real rate of return on the ten-year U.S. Treasury Bond.

Answer 1

P5. A thirty U.S. Treasury bond has a 4.0 percent interest rate. In contrast, a ten-year Treasury bond has an interest rate of 2.5 percent. A maturity risk premium is estimated to be .2 percentage points for the longer maturity bond. Investors expect inflation to average 1.5 percentage points over the next ten years.
a. Estimate the expected real rate of return on the ten-year U.S. Treasury Bond