# Determinant of Interest Rates

Determinant of Interest Rates Student Help Determinant of Interest Rates
The real risk-free rate of interest is 2%. Inflation is expected to be 2% this year and 4% during the next 2 years. Assume that the maturity risk premium is zero.

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What is the yield on 2-year Treasury securities? Round your answer to two decimal places.  %
What is the yield on 3-year Treasury securities? Round your answer to two decimal places.  %

A Treasury bond that matures in 10 years has a yield of 5%. A 10-year corporate bond has a yield of 9%. Assume that the liquidity premium on the corporate bond is 0.7%. What is the default risk premium on the corporate bond? Round your answer to two decimal places.
%

The real risk-free rate is 2%, and inflation is expected to be 4% for the next 2 years. A 2-year Treasury security yields 7.3%. What is the maturity risk premium for the 2-year security?
%

Determinants of Interest Rates
The real risk-free rate is 2%. Inflation is expected to be 2% this year, 4% next year, and then 4% thereafter. The maturity risk premium is estimated to be 0.0003 x (t – 1), where t = number of years to maturity. What is the nominal interest rate on a 7-year Treasury security? Round your answer to two decimal places.
%

Assume that the real risk-free rate, r*, is 2% and that inflation is expected to be 7% in Year 1, 6% in Year 2, and 3% thereafter. Assume also that all Treasury securities are highly liquid and free of default risk. If 2-year and 5-year Treasury notes both yield 10%, what is the difference in the maturity risk premiums (MRPs) on the two notes; that is, what is MRP5 minus MRP2? Round your answer to two decimal places.
%

Determinants of Interest Rates
Suppose you and most other investors expect the inflation rate to be 6% next year, to fall to 4% during the following year, and then to remain at a rate of 3% thereafter. Assume that the real risk-free rate, r*, will remain at 2% and that maturity risk premiums on Treasury securities rise from zero on very short-term securities (those that mature in a few days) to a level of 0.2 percentage points for 1-year securities. Furthermore, maturity risk premiums increase 0.2 percentage points for each year to maturity, up to a limit of 1.0 percentage point on 5-year or longer-term T-notes and T-bonds.

Interest Rate Sensitivity
A bond trader purchased each of the following bonds at a yield to maturity of 10%. Immediately after she purchased the bonds, interest rates fell to 7%. What is the percentage change in the price of each bond after the decline in interest rates? Fill in the following table. Round your answers to two decimal places.

Price @ 10%
Price @ 7%
Percentage Change

10-year, 10% annual coupon
\$
\$
%

10-year zero

%

5-year zero

%

30-year zero

%

\$100 perpetuity

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