You observe a AAA corporate bond with a 20-year maturity (wi…
You observe a AAA corporate bond with a 20-year maturity (without any special provisions) is currently paying 7.00% and a 20-year Treasury is paying 5.50%. Assume, for 20-year bonds, the inflation premium is 3.00%, the liquidity risk premium is 0.25%, the maturity risk premium is 1.00%, and none of those three premiums currently explain the difference between the AAA corporate bond and Treasury (in other words, the difference between the two bonds’ rates is not due to those three premiums). What is the real risk-free rate implied by the information above?