Assume Investors Demand a Real Rate of Return Equal to 3

question 20

Multiple Choice

Assume investors demand a real rate of return equal to 3 percent and that there is no maturity risk premium associated with Treasury securities.According to the Wall Street Journal, the average nominal yields on risk-free Treasury securities with different maturities are: What is the one-year nominal interest rate and the inflation premium that is expected in Year 4?

• A) 5.0%; 2.0%
• B) 4.5%; 1.5%
• C) 3.0%; 1.8%
• D) 5.6%; 2.6%
• E) There is not enough information to answer this question.

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