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Question
Assume that the real risk-free rate is 4 percent, and that inflation is expected to be 9 percent in Year 1, 6 percent in Year 2, and 4 percent thereafter. Also, assume that all Treasury bonds are highly liquid and free of default risk. If 2-year and 5-year Treasury bonds both yield 12 percent, what is the difference in the maturity risk premiums (MRPs) on the two bonds, i.e., what is MRP5 MRP2? (Round answer to one decimal place.)
a. 2.1%
b. 1.8%
c. 0.5%
d. 3.1%
e. 2.6%
Answer
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Related questions
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Q:
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d. Firms with relatively high debt ratios have higher expected returns when business is good.
e. Firms with relatively low debt ratios have higher expected returns when business is poor.