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You have determined the following data for a given bond: Real risk-free rate ( r * ) = 3%, the inflation premium = 8%, the
You have determined the following data for a given bond: Real risk-free rate ( r*) = 3%, the inflation premium = 8%, the default risk premium = 2%, and the maturity risk premium = 1%. What is the interest rate on long-term Treasury securities, or T-bonds,of the relevant maturity? (HINT: There is virtually no risk of default on a US Treasury security and they are traded in active markets which provide the necessary liquidity).
a. | 10% | |
b. | 11% | |
c. | 12% | |
d. | 13% | |
e. | 14% |
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