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problem: You are given the following information:

k* = real risk-free rate                   = 4%

Constant inflation premium             = 7%

Maturity risk premium                     = 1%

Default risk premium for AAA bonds = 3 percent

Liquidity premium for long-term T-bonds      = 2 percent

Suppose that a highly liquid market does not exist for long term T-bonds, & the expected rate of inflation is a constant. Given these situations, the nominal risk-free rate for T-bills is ___, & the rate on long-term Treasury bonds is ___.

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M919541

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