Suppose the Real Risk-Free Rate Is 4

Multiple Choice

Suppose the real risk-free rate is 4.20%, the average expected future inflation rate is 3.10%, and a maturity risk premium of 0.10% per year to maturity applies, i.e., MRP = 0.10%(t) , where t is the years to maturity, hence the pure expectations theory is NOT valid. What rate of return would you expect on a 4-year Treasury security? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.

A) 6.60%
B) 6.95%
C) 7.32%
D) 7.70%
E) 8.09%