Problem:
The real risk-free rate is 3%. Inflation is expected to be 3% this year, 4% next year and 3.5% thereafter. The MRP is estimated to be 0.05% (t-1) where t is the number of years to maturity.
Required:
Question: What is the nominal interest rate on a 7-yr U.S. Treasury bond? The answer is 6.8% but how is this found?
Note: Please describe comprehensively and provide step by step solution.