You Are Given the Following Data Assume That a Highly Liquid Market Does Not Exist for real

question 14

Multiple Choice

You are given the following data: $\begin{array}{llcc} \text {r*= real risk-free rate } &4\%\\ \text {Constant inflation premium } &7\%\\ \text {Maturity risk premium } &1\%\\ \text { Default risk premium for AAA bonds } &3\%\\ \text { Liquidity premium for long-term T-bonds } &2\%\\\end{array}$
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 .

• A)4%; 14%
• B)4%; 15%
• C)11%; 14%
• D)11%; 15%
• E)11%; 17%

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Definitions:

Inherited Money

Refers to wealth or assets passed down from one generation to another through wills or estates.

Ethnic Enclave

A geographic area with a high concentration of a particular ethnic group, distinct from the larger community in terms of culture, customs, and often language.

Italian Americans

A group of Americans of Italian descent, who have contributed significantly to American society, culture, and economy.

Little Italy

Neighborhoods in various cities characterized by a prominent Italian American presence, culture, and business community.