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The real risk-free rate is 2%. The inflation rate is expected to be 3% a year for the next three years and then 4% a
The real risk-free rate is 2%. The inflation rate is expected to be 3% a year for the next three years and then 4% a year thereafter. Assume that the default risk and liquidity premiums on all Treasury securities equal zero. You observe that 10-year Treasury bonds yield 1% more than the yield on 5-year Treasury bonds. What is the difference in the maturity risk premium on the two bonds? (That is, what is MRP10 - MRP5?) Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.
A. 0.7%
B. 0.5%
C. 0.1%
D. 0.3%
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