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

question 59

Multiple Choice

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

• A)2.1%
• B)1.8%
• C)0.5%
• D)3.1%
• E)2.6%

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Definitions:

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The way in which information and knowledge are organized and stored in the mind.

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Mental connections between concepts, events, or objects, which often influence memory and learning.

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A pioneering American psychologist and philosopher who was a leading thinker of the late 19th century, known for his work in pragmatism and functional psychology.

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A psychological process where deliberate attempts to suppress certain thoughts make them more likely to surface.