Problemthe real risk-free rate is 3 inflation is expected, Ask an Expert

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Problem:

The real risk-free rate is 3%. Inflation is expected to be 3% this year, 4% next year and 3.5% thereafter. The MRP is estimated to be 0.05% (t-1) where t is the number of years to maturity.

Required:

Question: What is the nominal interest rate on a 7-yr U.S. Treasury bond? The answer is 6.8% but how is this found?

Note: Please describe comprehensively and provide step by step solution.

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Category:- Basic Finance
Reference No.:- M91149158

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