Treasury Securities That Mature in 6 Years Currently Have an Interest

Multiple Choice

Treasury securities that mature in 6 years currently have an interest rate of 8.50 percent. Inflation is expected to be 5 percent in each of the next three years and 6 percent each year thereafter. The maturity risk premium is estimated to be 0.10% × (t - 1) , where t is equal to the maturity of the bond (i.e., the maturity risk premium of a one-year bond is zero) . The real risk-free rate is assumed to be constant over time. What is the real risk-free rate of interest?

A) 5.50%
B) 0.50%
C) 1.00%
D) 1.75%
E) 2.50%