5-year Treasury bonds yield 5.9%. The inflation premium (IP) is 1.9%, and the maturity risk premium...

5-year Treasury bonds yield 5.9%. The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-year bonds is 0.4%. What is the real risk-free rate, r*?

Select the correct answer.

a. 2.90%

b. 3.25%

c. 2.55%

d. 3.60%

Expert Solution

Given,

Bonds Yield = 5.9%

Inflation premium = 1.9%

Maturity risk premium = 0.4%

Solution :-

Real risk free rate = Bonds Yield - Inflation premium - Maturity risk premium

= 5.9% - 1.9% - 0.4% = 3.60%

jeff jeffy answered 2 years ago

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