Suppose the real risk-free rate is 3.50% and the future rate of inflation is expected to be constant at 4.80%. What rate of return would you expect on a 1-year Treasury security, assuming the pure expectations theory is valid?

Question

Laylah Boone

Business

29 July, 09:23

Suppose the real risk-free rate is 3.50% and the future rate of inflation is expected to be constant at 4.80%. What rate of return would you expect on a 1-year Treasury security, assuming the pure expectations theory is valid?

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Answers (1)

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Leonardo Ramsey · Answer 1

8.30%

Explanation:

The formula to compute the expected rate of return is shown below:

= Real risk-free rate + future rate of inflation + default risk premium + liquidity risk premium + maturity risk premium

= 3.50% + 4.80% + 0 + 0 + 0

= 8.30%

We simply added the real risk-free rate and the future rate of inflation so that the correct rate of return can come

We consider all the information which is given in the question as it is relevant for the computation part