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17 February, 13:15

5-year Treasury bonds yield 5.5%. The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-year bonds is 0.4%. What is the real risk-free rate, r*? 3.87% 3.52% 3.20% 2.88% 2.59%

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  1. 17 February, 17:09
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    option 3.20%

    Explanation:

    0.055-0.019-0.004 = 0.032 = 3.20%

    The inflation premium is added to the real risk-free rate as well to the maturity risk premium

    A no risk rate would be 3.2

    because there is a certain change for inflation a premium is added, also another premium is added to prevent investor to purchase the bond on a lower price.
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