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The Real Rate of Interest Is Expected to Be 3

question 88

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The real rate of interest is expected to be 3%, and the expected rate of inflation for next year is expected to be 5.5%. If the default risk premium is 1.1 percentage points, and the seniority risk premium is 0.4 percentage points, what is the required return on a 1-year U.S. Treasury security?


Definitions:

Normal Distribution

A bell-shaped distribution characterized by its mean and standard deviation, showing how data points are dispersed or spread out.

Chi-squared Probability Distribution

A distribution that represents the distribution of the sum of the squares of variables that are independent and normally distributed.

Normal Distribution

Another term for Gaussian distribution; a probability distribution that is symmetric around the mean, indicating that data close to the mean are more frequent than data far from the mean.

Variance

A measure of how much values in a dataset differ from the mean or average of the set, indicating the spread of the data.

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