The real risk-free rate of interest, r*, is 4%, and it is expected to remain constant over time. Inflation is expected to be 2% per year for the next three years, after which time inflation is expected to remain at a constant rate of 5% per year. The maturity risk premium is equal to 0.1(t - 1)%, where t is the bond’s time to maturity. The liquidity and default risk premia on 10-year corporate bonds are 2.0% and 2.5%, respectively. What is the yield to maturity on a 10-year Treasury bond?
A. 8.1%
B. 8.9%
C. 9.0%
D. 12.1%
E. 12.3%