Suppose the Real Risk-Free Rate Is 4

question 56

Multiple Choice

Suppose the real risk-free rate is 4.20%,the average expected future inflation rate is 4.20%,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,hence the pure expectations theory is NOT valid.What rate of return would you expect on a 4-year Treasury security? Disregard cross-product terms,i.e. ,if averaging is required,use the arithmetic average.

• A) 8.54%
• B) 8.80%
• C) 8.01%
• D) 7.92%
• E) 7.22%

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