You’ve just taken a job at a investment banking firm and been given the job of calculating the appropriate nominal interest rate for a number of different Treasury bonds with different maturity dates. The real risk- free interest rate that you have been told to use is 2.5%, and this rate is expected to continue on into the future without any change. Inflation is expected to be constant over the future at a rate of 2.0%. Since these are bonds that are issued by the U. S. Treasury, they do not have any default risk or any liquidity risk ( that is, there is no liquidity- risk premium). The maturity- risk premium is dependent upon how many years the bond has to maturity. The maturity- risk premiums are as follows:
Given this information, what should the nominal rate of interest on Treasury bonds maturing in 0– 1 year, 1– 2 years, 2– 3 years, and 3– 4 years be?
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