5-year Treasury bonds yield 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*?

real risk-free rate = 2.7 %

Step-by-step explanation:

Given data

Treasury bonds yield r = 5%

time = 5 year

(IP) = 1.9%

MRP = 0.4%

to find out

real risk-free rate r*

solution

we will find real risk-free rate r * by the given formula that is

Treasury bonds yield = real risk-free rate + IP + MRP + default risk premium + liquidity premium

so here default risk premium and liquidity premium both are zero

put all the other value we get real risk-free rate

real risk-free rate = 5% - 1.9 % - 0.4%

real risk-free rate = 2.7 %