The Real Rate of Interest Is Expected to Be 3

Multiple Choice

The real rate of interest is expected to be 3%, and the expected rate of inflation for next year is expected to be 5.5%. If the default risk premium is 1.1 percentage points, and the seniority risk premium is 0.4 percentage points, what is the required return on a 1-year U.S. Treasury security?

A) 9.6%
B) 10.0%
C) 8.5%
D) 8.9%