Assume that the real risk-free rate is 4 percent, and that inflation is expected to be 9 percent in Year 1, 6 percent in Year 2, and 4 percent thereafter. Also, assume that all Treasury bonds are highly liquid and free of default risk. If 2-year and 5-year Treasury bonds both yield 12 percent, what is the difference in the maturity risk premiums (MRPs) on the two bonds, i.e., what is MRP5- MRP2? (Round answer to one decimal place.)
A. 2.1%
B. 1.8%
C. 0.5%
D. 3.1%
E. 2.6%
Answer: A
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