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The nominal risk-free rate of return, r RP on one-year Treasury bonds is 0.8 percent. Giant Energys (GE) three-year bond has a yield equal to
The nominal risk-free rate of return, rRP on one-year Treasury bonds is 0.8 percent. Giant Energys (GE) three-year bond has a yield equal to 3.9 percent, which includes a liquidity premium equal to 0.4 percent. Suppose the maturity risk premium (MRP) for all bonds with maturities greater than one year is 0.1 percent per year, with a maximum of 1.0 percent. Based on this information, what should be the yield on GEs five-year bonds? Assume inflation expectations are constant during the next five years.
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