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 2.25%,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.

A) 5.15%
B) 5.42%
C) 5.69%
D) 5.97%
E) 6.27%