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What is the real risk-free rate of interest

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Question - 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%

Reference no: EM133117702

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