Calculate interest rate on seven-year treasury securities

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Suppose you and most other investors expect the inflation rate to be 3.00% next year, 4.00% during the following year, and then to remain at a rate of 5.00% thereafter. Assume that the real risk-free rate will remain at 1.00% and that maturity risk premiums on Treasury securities rise from zero on very short- term securities to a level of 0.10% percentage points for 1-year securities. Furthermore, maturity risk premiums increase 0.10 percentage points for each year to maturity, up to a limit of 1.00 percentage point on 10-year or longer-term T-notes and T-bonds. Calculate the interest rate on a 7-year Treasury securities.

Reference no: EM131898755

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