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problem: The real risk-free rate, k*, is three%. 2 year Treasury securities yield 6.5%. Three-year Treasury securities yield 7%. The Treasury securities have a maturity risk premium = 0.1 %( t - 1), where t = the maturity of the security. Suppose that the default risk premium and liquidity premium on all Treasury securities equals zero. The expected value of inflation for this next year (Year 1) is 3.25%. Determine the market anticipate will be the rate of inflation 3 years from now?

Basic Finance, Finance

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