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Assume that the real risk-free rate is 3.5% and that inflation is expected to be 7% in Year 1,5.5% in Year 2, and 4% thereafter.

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Assume that the real risk-free rate is 3.5% and that inflation is expected to be 7% in Year 1,5.5% in Year 2, and 4% thereafter. Assume also that all Treasury bonds are highly liquid and free of default risk. If 2 -year and 5 -year treasury bonds both yield 11%. what is the difference in the maturity risk premiums (MRPs) on the two bonds; that is, what is MRP5 - MRP2? 1.05 percent 0.75 percent 1.35 percent 1.80 percent

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