Final answer:
The equilibrium rate of return on a 1-year Treasury bond is 6.65%, calculated by adding the real risk-free rate of 3.05% to the expected inflation rate of 3.60%, as the maturity risk premium is zero.
Step-by-step explanation:
The correct answer is option D, 6.65%. To find the equilibrium rate of return on a 1-year Treasury bond, you can use the Fisher equation, which is nominal interest rate = real risk-free rate + expected inflation rate. Since the maturity risk premium is zero, which would normally adjust for the term of the investment, we can ignore it in this case. Using the given information, the real risk-free rate is 3.05%, and the expected inflation is 3.60%. Simply adding these together, we get 3.05% + 3.60% = 6.65%, without considering any cross-product terms, which aligns with option D.
The correct answer is option a. 8.18%. To calculate the equilibrium rate of return on a 1-year treasury bond, we need to consider the components of the equation. The equilibrium rate of return is calculated using the formula: equilibrium rate of return = real risk-free rate + inflation rate + maturity risk premium.
Given that the real risk-free rate is 3.05%, inflation is expected to be 3.60%, and the maturity risk premium is zero,
we can substitute these values into the equation:
equilibrium rate of return = 3.05% + 3.60% + 0% = 6.65%
Therefore, the equilibrium rate of return on a 1-year treasury bond is 6.65%.