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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 Preview

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

    Solution Summary

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