Problem:
5-year Treasury bonds yield 5.5%. The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-year bonds is 0.4%.
Required:
Question: What is the real risk-free rate, r*?
Answer
A. 2.59%
B. 2.88%
C. 3.20%
D. 3.52%
E. 3.87%
Note: Provide support for your rationale.