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Expected Interest Rate
For this problem, examine Treasury securities. Considering the following numbers, what would the yield on 3-year Treasury securities be?
- Real risk-free = 4%.
- Inflation expected at 1.5% for this year and 2% for the next 2 years.
- Maturity risk premium = 0.
Treasury Securities
Treasury securities—including Treasury bills, notes, and bonds—are debt obligations issued by the U.S. Department of the Treasury. Treasury securities are considered one of the safest investments because they are backed by the full faith and credit of the U.S. government. The income from Treasury securities may be exempt from state and local taxes, but not from federal taxes.
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