A 5-year long-term corporate bond yields 10%. The real risk-free rate is 2%. Inflation is forecasted to average 2% a year for the next 5 years. The maturity risk premium is estimated to be 1%(t-3), where t is the maturity of the bond. What will be the nominal rate of the long-term 5-year government security? (In percentage, type the percentage sign on your answer)

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A:

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Treasury Market

On-the-run securities are the most recently issued securities in the market depth and are therefore traded at some premium. The off-the-run securities are the ones issued just before the most recent ones. The on-the-run securities have a lower yield to the investor than the off-the-run securities.