Question

Suppose the real risk-free rate is 3.50% and the future rate of inflation is expected to be constant at 2.20%. What rate of return would you expect on a 1-year Treasury security, assuming the pure expectations theory is valid

Answer 1

Answer:

1.27%

Explanation:

Rate of return = [(1+real risk free rate)/(1+inflation rate)]-1

real risk free rate = 3.5%

inflation rate = 2.20%

Therefore Rate of return = [(1+ 3.5%)/(1+2.20%)]-1

=1.27%