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The real risk-free rate is 3.55%, inflation is expected to be 3.60% this year, and the maturity risk premium is zero. Taking account of the cross-product term, i.e., not ignoring it, what is the equilibrium rate of return on a 1-year Treasury bond?

Respuesta :

Answer:

7.15%

Explanation:

The formula to compute the equilibrium rate of return is shown below:

Expected rate of return = Risk-free rate of return + expected  inflation rate + (Market rate of return - Risk-free rate of return)

= 3.55% + 3.60% + 0

= 7.15%

The (Market rate of return - Risk-free rate of return)  is also known as market risk premium and the same is applied.

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