Problem 6-18 (c):

Suppose the inflation rate is expected to be 6.75% next year, 4.3% the following year, and 2.3% thereafter. Assume that the real risk-free rate, r*, will remain at 1.85% and that maturity risk premiums on Treasury securities rise from zero on very short-term bonds (those that mature in a few days) to 0.2% for 1-year securities. Furthermore, maturity risk premiums increase 0.2% for each year to maturity, up to a limit of 1.0% on 5-year or longer-term T-bonds.

Calculate the interest rate on 3-year Treasury securities.

Calculate with at least 4 decimal places on your calculator and round your final answer to two decimal places. For example, if your answer is $345.6671 enter as 345.67 and if your answer is .05718 or 5.718% enter as 5.72 in the answer box provided.