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Suppose the real risk-free rate is 4.20%, the average expected future inflation rate is 4.20%, and a maturity risk premium of 0.10% per year to
Suppose the real risk-free rate is 4.20%, the average expected future inflation rate is 4.20%, and a maturity risk premium of 0.10% per year to maturity applies, i.e., MRP = 0.10%(t), where t is the number of years to maturity. What rate of return would you expect on a 4-year Treasury security? Disregard cross-product terms.
| a. | 8.54% |
| b. | 8.80% |
| c. | 8.01% |
| d. | 7.92% |
| e. | 7.22% |
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