Assume That the Real Risk-Free Rate, R*, Is 4 Percent

question 13

Multiple Choice

Assume that the real risk-free rate, r*, is 4 percent, and that inflation is expected to be 9% in Year 1, 6% in Year 2, and 4% thereafter.Assume also that all Treasury bonds are highly liquid and free of default risk.If 2-year and 5- year Treasury bonds both yield 12%, what is the difference in the maturity risk premiums (MRPs) on the two bonds, i.e., what is MRP5 − MRP2?

• A)2.1%
• B)1.8%
• C)5.0%
• D)3.0%
• E)2.5%

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Definitions:

Polar

Relating to the poles of a planet, or exhibiting opposite characteristics at different ends of an axis.

Polar

Relating to the North and South Poles of Earth or the regions surrounding them, characterized by extremely cold temperatures.

Magnetic Properties

Characteristics of materials that determine their response to an applied magnetic field, including magnetization and magnetic susceptibility.

Hydrogen Atoms

The simplest and most abundant element in the universe, consisting of one proton and one electron.