An analyst evaluating securities has obtained this information: The real rate of interest is $3\%,$ and it is expected to remain constant for the next $3$ years. Inflation is expected to be $2\%$ next year, $2\mathrm{.}5\%$ the year after, and $3\%$ in the third year. The maturity risk premium is estimated to be

$0\mathrm{.}1$ x $($t $1)\%,$ where t represents the number of years to maturity on relevant $3-$year securities$.$ The liquidity premium on relevant $3-$year securities is $0\mathrm{.}25\%,$ and the default risk premium on relevant $3-$year securities is $0\mathrm{.}6\%.$

What is the yield for the above example if the security is a $3-$year Treasury bond?

$5\%$

$5\mathrm{.}2\%$

$5\mathrm{.}45\%$

$$ Incorrect

Feedback:

Incorrect. Please identify the risk for relevant securities in the given time period and then calculate the yield according to this equation: Yield $=$ r$*+$ IP $+$ MRP $+$ DRP $+$ LRP

$5\mathrm{.}7\%$