Suppose the real risk-free rate is 3.5% and is expected to remain constant in the foreseeable future. Inflation is expected to be 3% per year over the next three years. The maturity risk premium (MRP) is determined by the following formula, where t equals the security’s maturity: MRPt = 0.1(t-1)%. What is the expected yield on a three-year Treasury security? Disregard cross-product terms; that is, if averaging is required, use the arithmetic average.
A.3.7%
B.4.2%
C.6.7%
D.7.7%
E.8.9%
A.3.7%
B.4.2%
C.6.7%
D.7.7%
E.8.9%