Question

The real risk-free rate is 3.05%, inflation is expected to be 3.60% this year, and the maturity risk premium is zero. Ignoring any cross-product terms, i.e., if averaging is required, use the arithmetic average, what is the equilibrium rate of return on a 1-year Treasury bond? - Google Search

Answer 1

Answer:

6.65%

Explanation:

Real risk-free rate = 3.05% (r*)

Expected inflation = 3.60% (IP)

Maturity risk premium = zero

1-year bond yield = r* + IP

1-year bond yield = 3.05% + 3.60%

1-year bond yield = 6.65%

Hence, the equilibrium rate of return on a 1-year Treasury bond is 6.65%