5-year Treasury bonds yield 5.5%. The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-year T-bonds is 0.4%. There is no liquidity premium on these bonds. What is the real risk-free rate, r*?
a. |
3.52% |
|
b. |
2.59% |
|
c. |
2.88% |
|
d. |
3.20% |
|
e. |
3.87% |
rd = r* + IP + DRP + LP + MRP
rd = Required rate of return on a debt security.
r* = Real risk-free rate.
IP = Inflation premium.
DRP = Default risk premium.
LP = Liquidity premium.
MRP = Maturity risk premium
Real risk-free rate = rd-(IP + DRP + LP + MRP)
= 5.5-(1.9+.4)
= 3.20%
5-year Treasury bonds yield 5.5%. The inflation premium (IP) is 1.9%, and the maturity risk premium...
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