PPT Slide

Step 3: Add the IPs and MRPs to k*:

kT = k* + IPt + MRPt.

kT = Quoted market interest

rate on Treasury securities.

Assume k* = 3%:

1-Yr: kT1 = 3% + 5% + 0.0% = 8.0%.

10-Yr: kT10 = 3% + 7.5% + 0.9% = 11.4%.

20-Yr: kT20 = 3% + 7.75% + 1.9% = 12.7%.

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