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Explain the real risk-free rate of interest

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Treasury securities that mature in 7 years currently have an interest rate of 10.5%. 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 0.2%(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?

Reference no: EM133072594

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