Question

Suppose the real risk-free rate is 3.00%, the average expected future inflation rate is 5.90%, 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. 10.35% b. 7.29% c. 8.91% d. 9.00% e. 9.27%

Answer 1

the rate of return that expected on one year treasury security is 9.00%

Step-by-step explanation:

The computation of the rate of return that expected on one year treasury security is as followS

= Risk free rate + average expected future inflation rate + maturity risk premium

= 3.00% + 5.90% + 0.10%

= 9.00%

Hence, the rate of return that expected on one year treasury security is 9.00%

Therefore the correct option is d.

And, the rest of the options are wrong