Treasuiny secuetries that mature if a years

currequtly bwave aw fivterest rate of $9$ha$.$ Inflation is

expected to be $5\%,8\%,$ and $7x6$ in the next three

years. The maturity risk premium is estimated to

be $0\mathrm{.}1\%(t-1),$ where $t$ is equal to the maturity of

the bond $($i$.$e$.,$ the maturity risk premium of a one$-$

year bond is zero$).$ The real risk$-$free rate is

assumed to be constant over time. What is the

real risk$-$free rate of interest?

Hint: Treasury securities have default risk

premium $($DRP$)$ and liquidity risk premium $($LP$)$

zero.

$2\mathrm{.}0\%$

$2\mathrm{.}5\%$

$2\mathrm{.}8\%$

$3\mathrm{.}0\%$