Suppose most investors expect the inflation rate to be 5% next year, 6% the following year, and 7% thereafter. The real risk-free rate is 3.5%. The maturity risk premium is zero for bonds that mature in 1 year or less, 0.3% for 2-year bonds, and then the MRP increases by 0.3% per year thereafter for 20 years, after which it is stable. What is the interest rate on 1-year, Treasury bonds? Question 9Answer a. 15,43% b. 5% c. 12.57% d. 8.50%

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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.