The real risk-free rate is 4%. Inflation is expected to be 2% this year, 4% next year, and then 5.5% thereafter. The maturity risk premium is estimated to be 0.0007 x (t - 1), where t = number of years to maturity. What is the nominal interest rate on a 7-year Treasury security? Round your answer to two decimal places.
%
Inflation Premium = [2% + 4% + (5*5.5%)] / 7 = 33.5% / 7 = 4.79%
Maturity risk premium = 0.0007 * [7 - 1] = 0.0042, or 0.42%
r = real risk-free rate + inflation premium + maturity risk premium + default risk premium + liquidity premium
= 4% + 4.79% + 0.42% = 9.21%
The real risk-free rate is 4%. Inflation is expected to be 2% this year, 4% next...
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