Problem:
Suppose the real risk-free rate, r*, is 2% and investors expect inflation to be 4% next year, 5% the following year, and 7% per year thereafter. Assume the MRP is zero for Year 1 and increases by 0.1% each year.
Required:
Question: Compute the quoted, or risk-free, rate of return for Year 8.
Note: Provide support for your underlying principle.