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T-bills and treasury bonds

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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 ???

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Solution Summary

The solution calculates the long-term treasury bonds and nominal risk-free rates for T-bills.

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Risk free rate for T bills = Real risk free rate + constant inflation premium = ...

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