A thirty- year U. S. Treasury bond has a 4.0 percent
interest rate. In contrast, a ten- year...

Question

A thirty- year 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 0.2 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.
b. If the real rate of return is expected to be the same for
the thirty- year bond as for the ten- year bond, estimate the average annual
inflation rate expected by investors over the life of the thirty- year bond.

Robert · Accepted Answer

A thirty- year 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 0.2 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. 
b.

A thirty- year 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 0.2...

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