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 (0.1% for a 1-year loan, increasing by 0.1% each additional year), the LR (0.5% for a security with low liquidity and 1.0% for one with very low liquidity), and the DR (0 for a 1-year loan, 0.1% for a 2-year loan, increasing by 0.15 % for each additional year). The expected inflation rates are also taken into account, with 3.0% expected in year 1, 4.0% expected in year 2, and 5.0% expected in year 3 and thereafter.

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