You Are Given the Following Data Assume That a Highly Liquid Market Does Not Exist for }

You are given the following data:
$$\begin{array} { l c } r ^ { * } = \text { real risk-free rate } & 4 \% \\& \\\text { Constant inflation premium (IP) } & 7 \% \\\text { Maturity risk premium (MRP) } & 1 \% \\\text { Default risk premium for AAA bonds (DRP) } & 3 \% \\\text { Liquidity premium for long-term T-bonds (LP) } & 2 \%\end{array}$$
Assume that a highly liquid market does not exist for long-term T-bonds, and the expected rate of inflation is a constant. Given these conditions, the rate on long-term Treasury bonds is _____.

A) 23%
B) 11%
C) 14%
D) 19%
E) 27%

Correct Answer:

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