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Suppose you and other investors expect that inflation will be 3% next year, to rise to 5% during the following year and then to remain at 7.6% thereafter.

Further you expect that the real risk free rate of interest will remain at 2% and the maturity risk premium on treasury securities will rise from .2% for one year bonds.

Maturity risk premiums are expected to increase 0.2% for each year to maturity up to a limit of 1.0 percentage point on 5-year or longer term T-bonds.

What is the return on a 4-year bond? Write your answer as a percentage i.e. 8% is 8.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92850470

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