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

question 55

Multiple Choice

You are given the following data:
$$\begin{array} { l c } r ^ { * } = \text { real risk-free rate } & 4 \% \\& \\\text { Constant inflation premium (IP) } & 7 \% \\\text { Maturity risk premium (MRP) } & 1 \% \\\text { Default risk premium for AAA bonds (DRP) } & 3 \% \\\text { Liquidity premium for long-term T-bonds (LP) } & 2 \%\end{array}$$
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 rate on long-term Treasury bonds is _____.

• A) 23%
• B) 11%
• C) 14%
• D) 19%
• E) 27%

---

Definitions:

Capital Investment

Funding provided to a business entity to purchase physical assets, like equipment or buildings, or to use in operations to stimulate growth.

Present Value Method

A financial calculation that determines the current worth of a future stream of cash flows, discounted at a specific rate.

Estimated Average

A calculation that aims to determine the central or typical value of a data set or projection.

Average Rate

A calculation representing the central or typical value in a set of rates, or a fixed rate determined as an average from several rates.