Question

the real risk-free rate is 3.75%, inflation is expected to be 2.85% this year, and the maturity risk premium is zero. taking account of the cross-product term, i.e., not ignoring it, what is the equilibrium rate of return on a 1-year treasury bond? (round your final answer to 3 decimal places.

Answer 1

To calculate the equilibrium rate of return on a 1-year treasury bond, we need to consider several factors: the real risk-free rate, expected inflation, and the maturity risk premium.

Given:

Real risk-free rate = 3.75%

Expected inflation = 2.85%

Maturity risk premium = 0

The equation for the equilibrium rate of return is as follows:

Equilibrium Rate = Real risk-free rate + Inflation + Maturity risk premium

In this case, since the maturity risk premium is zero, we can ignore it and simplify the equation to:

Equilibrium Rate = Real risk-free rate + Inflation

Plugging in the given values:

Equilibrium Rate = 3.75% + 2.85%

Calculating the sum:

Equilibrium Rate = 6.60%

Therefore, the equilibrium rate of return on a 1-year treasury bond, taking into account the cross-product term, is 6.60%.

Step-by-step explanation:

hope this helps

Answer 2

To calculate the equilibrium rate of return on a 1-year treasury bond, we need to consider the various components: the real risk-free rate, expected inflation, and the maturity risk premium.

The formula to calculate the equilibrium rate of return is as follows:

Equilibrium Rate of Return = Real Risk-Free Rate + Expected Inflation + Maturity Risk Premium

Given the information provided:

Real Risk-Free Rate = 3.75%

Expected Inflation = 2.85%

Maturity Risk Premium = 0% (as mentioned)

Now, let's calculate the equilibrium rate of return:

Equilibrium Rate of Return = 3.75% + 2.85% + 0% = 6.60%

Therefore, the equilibrium rate of return on a 1-year treasury bond, taking into account the cross-product term, is 6.60% (rounded to three decimal places).

Please note that the numbers used in this calculation are for demonstration purposes and may not reflect the current market conditions.