Problem: Treasury securities that have an interest rate of 8.5 percent will mature in six years. Over the next six years, the inflation rate is projected at 6 percent for each of the next three years and 5 percent each year thereafter. Using t as the number of years to maturity of the bond, the maturity risk premium may be computed as follows 0.1%(t - 1). (In other words, the maturity risk premium of a one-year bond is zero.)

Required:

Assuming the real risk-free rate is constant over time, what is the real risk-free interest rate? Explain your answers and provides examples.