Question

5-year Treasury bonds yield 3.8%. 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*?

Select the correct answer.

a. 1.62%

b. 1.50%

c. 1.98%

d. 1.74%

e. 1.86%

Answer 1

Solution:-

Real Risk Fee Rate = Yield - inflation Premium - MRP

= 3.8% - 1.9% - 0.4%

=1.50%

SO the answer is Option (B) 1.50%