. What is the nominal interest rate (k) of a 5-year U.S. Treasury bond with a real risk-free
rate of interest of 1% and inflation expected to be at 3.5% per year? Assume that the
maturity risk premium is zero.

To calculate the nominal interest rate (k) for the bond, you can use the Fisher equation, which is expressed as:

\[ 
k = r + \pi 
\]

where:
- \( k \) is the nominal interest rate,
- \( r \) is the real risk-free rate,
- \( \pi \) is the expected inflation rate.

Given:
- Real risk-free rate (\( r \)) = 1% = 0.01
- Expected inflation rate (\( \pi \)) = 3.5% = 0.035

Now, substitute the values into the equation:

\[
k = 0.01 + 0.035 = 0.045
\]

Convert this into a percentage:

\[
k = 4.5\%
\]

Therefore, the nominal interest rate of the 5-year U.S. Treasury bond is **4.5%**.

### Questions to Explore Further:
1. How do changes in inflation expectations affect nominal interest rates?
2. What are the implications of a zero maturity risk premium for bond pricing?
3. How does the real risk-free rate relate to overall economic conditions?
4. What other factors can influence nominal interest rates apart from inflation?
5. How do Treasury bonds compare to other investment options in terms of risk and return?

### Tip:
Consider looking into the term structure of interest rates to understand how bonds of different maturities are priced in relation to each other.

What is the nominal interest rate (k) of a 5-year U.S. Treasury bond with a real risk-free rate of interest of 1% and inflation expected to be at 3.5% per year? Assume that the maturity risk premium is zero.

Discover how to calculate the nominal interest rate (k) for a 5-year U.S. Treasury bond using the Fisher equation. With a real risk-free rate of 1% and expected inflation of 3.5%, learn the key concepts in finance and how they relate to interest rates. Suitable for students in Grades 10-12.

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