Suppose the inflation rate is expected to be 6.75% next year, 4.75% the following year, and 3.35% thereafter. Assume that the real risk-free rate, r*, will remain at 2.45% and that maturity risk premiums on Treasury securities rise from zero on very short-term bonds (those that mature in a few days) to 0.2% for 1-year securities. Furthermore, maturity risk premiums increase 0.2% for each year to maturity, up to a limit of 1.0% on 5-year or longer-term T-bonds. Required:
a. Calculate the interest rate on 1-year Treasury securities. Round your answer to two decimal places.
b. Calculate the interest rate on 2-year Treasury securities. Round your answer to two decimal places.
c. Calculate the interest rate on 3-year Treasury securities. Round your answer to two decimal places.
d. Calculate the interest rate on 4-year Treasury securities. Round your answer to two decimal places.
e. Calculate the interest rate on 5-year Treasury securities. Round your answer to two decimal places.
f. Calculate the interest rate on 10-year Treasury securities. Round your answer to two decimal places.
g. Calculate the interest rate on 20-year Treasury securities. Round your answer to two decimal places.