Suppose the Real Risk-Free Rate Is 3

Multiple Choice

Suppose the real risk-free rate is 3.00%,the average expected future inflation rate is 4.00%,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.What rate of return would you expect on a 1-year Treasury security,assuming the pure expectations theory is NOT valid? Include the cross-product term,i.e. ,if averaging is required,use the geometric average.(Round your final answer to 2 decimal places. )

A) 8.88%
B) 7.15%
C) 7.22%
D) 7.80%
E) 8.95%