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28 September, 12:45

Suppose the real risk-free rate is 3.50% and the future rate of inflation is expected to be constant at 2.20%. What rate of return would you expect on a 1-year Treasury security, assuming the pure expectations theory is valid

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  1. 28 September, 12:51
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    1.27%

    Explanation:

    Rate of return = [ (1+real risk free rate) / (1+inflation rate) ]-1

    real risk free rate = 3.5%

    inflation rate = 2.20%

    Therefore Rate of return = [ (1 + 3.5%) / (1+2.20%) ]-1

    =1.27%
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