) A thirty-year U.S Treasury bond has a 4.0 percent interest rate. In

Contrast, a ten-year Treasury bond has an interest rate of 2.5 percent.
A maturity risk premium is estimated to be 0.2 percentage points for the
Longer maturity bond. Investors expect inflation to average 1.5 percentage
Points over the next ten years.
A) Estimate the expect real rate of return on the ten-year U.S treasury bond.
B) If the real rate of return is expected to be the same for the thirty-year bond
Estimate the average annual inflation rate expected by investors over the life
Of the thirty-year bond.

A) To estimate the expected real rate of return on the ten-year U.S Treasury bond, we need to subtract the expected inflation rate from the nominal interest rate.

The nominal interest rate on the ten-year Treasury bond is 2.5 percent.

The expected inflation rate is 1.5 percentage points.

Therefore, the expected real rate of return on the ten-year U.S Treasury bond is:

Real Rate of Return = Nominal Interest Rate - Expected Inflation Rate
= 2.5% - 1.5%
= 1.0%

So, the estimated expected real rate of return on the ten-year U.S Treasury bond is 1.0%.

B) If the real rate of return is expected to be the same for the thirty-year bond, we can use the same 1.0% obtained in the previous calculation.

The nominal interest rate on the thirty-year Treasury bond is 4.0 percent.

We need to estimate the average annual inflation rate expected by investors over the life of the thirty-year bond.

To estimate the average annual inflation rate, we subtract the real rate of return from the nominal interest rate:

Nominal Interest Rate = Real Rate of Return + Expected Inflation Rate

Rearranging the equation, we get:

Expected Inflation Rate = Nominal Interest Rate - Real Rate of Return
= 4.0% - 1.0%
= 3.0%

So, the estimated average annual inflation rate expected by investors over the life of the thirty-year bond is 3.0%.

A) To estimate the expected real rate of return on the ten-year U.S Treasury bond, we need to subtract the expected inflation rate from the nominal interest rate.

The nominal interest rate on the ten-year bond is given as 2.5 percent. The expected inflation rate is stated to be 1.5 percentage points over the next ten years.

Therefore, the expected real rate of return can be calculated as follows:
Real rate of return = Nominal interest rate - Expected inflation rate
Real rate of return = 2.5% - 1.5%
Real rate of return = 1.0%

Therefore, the expected real rate of return on the ten-year U.S Treasury bond is 1.0%.

B) If the real rate of return is expected to be the same for the thirty-year bond, we can also estimate the average annual inflation rate expected by investors over the life of the thirty-year bond.

Given that the thirty-year bond has an interest rate of 4.0% and a maturity risk premium of 0.2 percentage points, we need to subtract these from the nominal interest rate to find the expected inflation rate.

Nominal interest rate = Real rate of return + Expected inflation rate
4.0% = 1.0% + Expected inflation rate + 0.2%
4.0% - 1.0% - 0.2% = Expected inflation rate
Expected inflation rate = 2.8%

Therefore, the average annual inflation rate expected by investors over the life of the thirty-year bond is 2.8%.