(Solution Document) Assume that the real risk free rate (r*) is 3% and that inflation is expected to


11. Assume that the real risk free rate (r*) is 3% and that inflation is expected to be 8% in Year 1, 5% in Year 2, and 4% thereafter.  Assume also that all Treasury Securities are highly liquid and free of default risk.  If Two-Year and 5-Year Treasury securities both yield 10%, what is the difference in the maturity risk premium on the two securities? (Points : 30)

 







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