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? (round your final answer to 3 decimal places.)

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Business

Manuel Murphy

5 January, 04:13

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? (round your final answer to 3 decimal places.)

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Sullivan Murphy · Answer 1

Equilibrium rate of return on a 1-year treasury bond formula is:

(1 + r) (1 + i) - 1

Where r = real risk-free rate (not in percentage)

i = inflation expected (not in percentage)

r = 3.55% = 3.55/100 = 0.0355

i = 3.60% = 3.60/100 = 0.036

Plug these values in the aforementioned formula, you would get:

(1 + 0.0355) * (1 + 0.036) - 1 = 0.072778

Now to get back in % multiple it with 100,

You would get 7.278%.

Ans: 7.278%