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The real risk-free rate is 3%. The inflation rate is expected to be 4% for the next two years, 4.5% for Years 3 and 4,
The real risk-free rate is 3%. The inflation rate is expected to be 4% for the next two years, 4.5% for Years 3 and 4, and 5% for each year thereafter. The liquidity and default risk premiums are equal to zero for Treasury securities. The 6-year Treasury bonds yield 0.6% more than 4-year Treasury bonds, and the maturity risk premium on the 6-year Treasury bonds (MRP6) is 0.9%. What is the maturity risk premium on the 4-year Treasury bonds (MRP4)? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.
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