Suppose the Real Risk-Free Rate Is 3

question 48

Multiple Choice

Suppose the real risk-free rate is 3.00%,the average expected future inflation rate is 6.60%,and a maturity risk premium of 0.10% per year to maturity applies,i.e. ,MRP = 0.10%(t) ,where t is the number of years to maturity.What rate of return would you expect on a 1-year Treasury security,assuming the pure expectations theory is NOT valid? Disregard cross-product terms,i.e. ,if averaging is required,use the arithmetic average.

• A) 8.83%
• B) 7.47%
• C) 9.12%
• D) 9.70%
• E) 8.54%

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