What would be the interest rate on a 10-year Treasury note, given the following information?
  k_pr = 1%
  MR = 0.1% for a 1-year loan, increasing by 0.1% each additional year.
  LR = 0.5% for a security with low liquidity and 1.0% for one with very low liquidity.
  DR= 0 for a 1-year loan, 0.1% for a 2-year loan, increasing by 0.15 % for each additional
   year.
  Expected inflation rates:
   Year 1 = 3.0%
   Year 2 = 4.0%
   Year 3 and thereafter: 5.0%

Question

Quizplus · Accepted Answer

The correct answer is A because the interest rate on a 10-year Treasury note would be 6.7%. This is calculated by adding the kpr (1%), the MR for 10 years (1%), the LR for low liquidity (0.5%), the DR for 10 years (1.5%), and the expected inflation rate for 10 years (2.7%).

What Would Be the Interest Rate on a 10-Year Treasury