Question 1: Suppose you and most other investors expect the inflation rate to be 7 percent next
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Question 1: Suppose you and most other investors expect the inflation rate to be 7 percent next year, to fall to 5 percent during the following year, and to remain at a rate of 3 percent thereafter. Assume that the real-risk rate k*, will remain at 2 percent and that the maturity risk premium on the Treasury securities rise from zero on very short-term securities (those that mature in a few days) to a level of 0.2 percentage point for 1-year securities. Furthermore, MRPs increase 0.2 percentage point for each year to maturity, up to a limit of 1.0 percentage point on 5-year or longer-term T-notes and T-bonds.
required:
Calculate the interest rate on 1, 2, 3, 4, 5, 10, and 20 year Treasury Securities
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