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Assume that the real risk - free rate, r * , is 4 % and that inflation is expected to be 7 % in Year

Assume that the real risk-free rate, r*, is 4% and that inflation is expected to be 7% in Year 1,5% in Year 2, and 3% thereafter. Assume also that all Treasury securities are highly liquid and free of default risk. If 2-year treasury notes and 5-year treasury notes both yield 10%, what is the difference in the maturity risk premiums on the two notes? [i.e. what is MRP(5) minus MRP(2)?]

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