Question: Return rate on TIP = 3%. * Inflation rate is expected to be 8% in year 1, 5% in year 2, and 4% thereafter. *

Return rate on TIP = 3%.

* Inflation rate is expected to be 8% in year 1, 5% in year 2, and 4% thereafter.

* All T-bonds are highly liquid and free of default risk.

If a 2-year T-bond yields 11%, what is the maturity risk premium?

Select one:

a. 14.5%

b. 3.5%

c. 0.5%

d. 1.5%

e. 1.0%

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