Suppose the Real Risk-Free Rate Is 3

Multiple Choice

Suppose the real risk-free rate is 3.50% and the future rate of inflation is expected to be constant at 4.10%.What rate of return would you expect on a 1-year Treasury security,assuming the pure expectations theory is valid? Include cross-product terms,i.e. ,if averaging is required,use the geometric average.(Round your final answer to 2 decimal places. )

A) 6.58%
B) 7.74%
C) 9.37%
D) 6.50%
E) 7.90%