12. The real risk-free rate is 3%, and inflation is expected to be 3% this year, 4% next year, and 3.5% thereafter. The maturity risk premium is estimated to be 0.05 X (t-1)% where t = number of years to maturity. What is the yield on a 7-year Treasury note?

6.8%

Explanation:

Formula: r = r* + IP + MRP + DRP + LP.

Therefore:

r = Real risk-free rate + Inflation premium + Default risk premium + Liquidity premium

r* = 0.03

IP= 0.03+0.04=0.07

0.07+5×0.035=0.245

0.245/7=0.035

The maturity risk premium was provided in the problem as:

0.05 x (t – 1)%

MRP = 0.05(7-1)%

= 0.05(6%) = 0.0030

DRP = 0

LP = 0

Addition of all will be:

rt7 = 0.03 + 0.035 + 0.0030 = 0.068 = 6.8%

The yield on a 7-year Treasury note is 6.8%

how does that happen,where u steel points

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