Problem:
Current yield on 10 year and 30 year U.S. treasury securities are 2.57% and 3.28% respectively. Assume the default risk premium (DRP) and liquidity premium (LP) are zero.
Answer the given questions:
Question 1: What is the bond market predicting about the rate of inflation in the next 10 to 30 years?
Question 2: What is the bond market predicting about the real-risk free rate of inflation in the next 10 to 30 years?
Question 3: Would you invest $1000 today in a 30 year treasury security at current rates? Explain you answer.
Question 4: Do you think the assumption of the default risk premium being zero is a good assumption? Explain your answer. Please describe in detail and provide step by step solution.