Help with this problem:
With the following data-
-k* real risk 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.
The nominal risk-free rate for T-bills would be ???
The rate on long-term treasury bonds is ???
Risk free rate for T bills = Real risk free rate + constant inflation premium = ...
The solution calculates the long-term treasury bonds and nominal risk-free rates for T-bills.