Suppose most investors expect the inflation rate to be 5% next year, 6% the following year, and 7% thereafter. The real risk-free rate is 3.5%. The maturity risk premium is zero for bonds that mature in 1 year or less, 0.3% for 2-year bonds, and then the MRP increases by 0.3% per year thereafter for 20 years, after which it is stable. What is the interest rate on 9-year Treasury bonds?

Question 5Answer

a.

15.43%

b.

8.50%

c.

12.57%

d.

5.00%