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 8.5%.Inflation is expected to be 5% each of the next three years and 6% each year after the third year.The maturity risk premium is estimated to be 0.1%(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) 0.25%
B) 0.50%
C) 1.00%
D) 1.75%
E) 2.50%