Treasury securities that mature in 6 years currently have an interest rate of 8.5%. Inflation is expected to be 5% in 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%
Answer: E
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