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Treasury securities that have an interest rate of 8.5 percent will mature in six years. Over the next six years, the inflation rate is projected
Treasury securities that have an interest rate of 8.5 percent will mature in six years. Over the next six years, the inflation rate is projected at 6 percent for each of the next three years and 5 percent each year thereafter. Using t as the number of years to maturity of the bond, the maturity risk premium may be computed as follows 0.1%(t - 1). (In other words, the maturity risk premium of a one-year bond is zero.) Assuming the real risk-free rate is constant over time, what is the real risk-free interest rate?
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