Suppose the real risk-free rate is 3.00%, the average expected future inflation rate is 6.20%,...
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Suppose the real risk-free rate is 3.00%, the average expected future inflation rate is 6.20%, 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. 8.73% b. 9.39% c. 9.49% d. 8.44% e. 8.16%
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