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 _____.© BrainMass Inc. brainmass.com June 3, 2020, 6:27 pm ad1c9bdddf
The solution discusses long term t-bonds and risk free rate for t-bills.