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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