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    Long term T-bonds and risk free rate for T-bills

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    If given the following data:

    r* = real risk-free rate = 4%
    Constant inflation premium = 7%
    Maturity risk premium = 1%
    Default risk premium for AAA bonds = 3%
    Liquidity premium for long-term T-bonds = 2%

    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 _____.

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    Solution Summary

    The solution discusses long term t-bonds and risk free rate for t-bills.