You are given the following data: • k* = real risk-free rate = 4%. • Constant inflation premium = 7%. • Maturity risk premium = 1%. • Default risk premium for AAA bonds = 3%. • Liquidity premium for long-term T-bonds = 2%. Assume that a highly liquid market does not exist for long-term T-bonds, and the expected rate of inflation is a constant. Given these conditions, the nominal risk-free rate for T-bills is , and the rate on long-term Treasury bonds is 4%; 14% 4%; 15% 11%; 14% 11%; 15%
You are given the following data: • k* = real risk-free rate = 4%. • Constant inflation premium = 7%. • Maturity risk premium = 1%. • Default risk premium for AAA bonds = 3%. • Liquidity premium for long-term T-bonds = 2%. Assume that a highly liquid market does not exist for long-term T-bonds, and the expected rate of inflation is a constant. Given these conditions, the nominal risk-free rate for T-bills is , and the rate on long-term Treasury bonds is 4%; 14% 4%; 15% 11%; 14% 11%; 15%
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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You are given the following data: • k* = real risk-free rate = 4%. • Constant inflation premium = 7%. • Maturity risk premium = 1%. • Default risk premium for AAA bonds = 3%. • Liquidity premium for long-term T-bonds = 2%. Assume that a highly liquid market does not exist for long-term T-bonds, and the expected rate of inflation is a constant. Given these conditions, the nominal risk-free rate for T-bills is , and the rate on long-term Treasury bonds is
4%; 14%
4%; 15%
11%; 14%
11%; 15%
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