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The real risk-free rate of interest, r*, is 4 percent, and it is expected to remain constant over time.  Inflation is expected to be  2 percent per year for the next three years, after which time inflation is expected to remain at a constant rate of 5 percent per year.  The maturity risk premium is equal to 0.1(t - 1)%, where t = the bond’s maturity.  What is the yield on a 10-year Treasury bond?

The real risk-free rate of interest, r*, is 4 percent, and it is expected to remain constant over time.  Inflation is expected to be  2 percent per year for the next three years, after which time inflation is expected to remain at a constant rate of 5 percent per year.  The maturity risk premium is equal to 0.1(t - 1)%, where t = the bond’s maturity.  What is the yield on a 10-year Treasury bond?

Intermediate Financial Management (MindTap Course List)
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter4: Bond Valuation
Section: Chapter Questions
Problem 18P
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The real risk-free rate of interest, r*, is 4 percent, and it is expected to remain constant over time.  Inflation is expected to be  2 percent per year for the next three years, after which time inflation is expected to remain at a constant rate of 5 percent per year.  The maturity risk premium is equal to 0.1(t - 1)%, where t = the bond’s maturity.  What is the yield on a 10-year Treasury bond?

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