Question: Assume that the real risk free rate r is 3 and that
Assume that the real risk-free rate, r*, is 3% and that inflation is expected to be 8% in Year 1, 5% in year 2, and 4% thereafter. Assume also that all treasury securities are highly liquid and free of default risk. If 2-year and 5-year and 5-year treasury notes both yields 10%, what is the difference in the maturity risk premiums (MRPs) on the two notes; that is, what is MRPs minus MRP2?
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