kmarks Window Help Quiz: Exam 2 structure.com/courses/1323846/quizzes/1748642/ta

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kmarks Window Help Quiz: Exam 2 structure.com/courses/1323846/quizzes/1748642/take yUSF Quiz: Ex DQuestion 18 5 pts Suppose the real risk-free rate is 3.00%, the average expected future inflation rate is 2.25%, and a maturity risk premium of 0.10% per year to maturity applies, i.e., MRP-0.10%(t-1) where t is the number of years until maturity. What rate of return would you expect to earn on a 1-year Treasury security? ? 5.08% O 5.25% 0 5.62% ? 5.90% 6.19% Question 19 5 pts In the foreseeable future, the real risk-free rate of interest,r. is expected to remain at 3%, inflation is expected 12

Explanation / Answer

Rate of return to expect on a 1 year treasury security is the risk free rate as the security is issued by the government,thus considered risk free with negligible risk of default.

Risk free rate=Real risk free rate of return + future inflation rate

=3 + 2.25

=5.25%

There expected return on the security is 5.25%

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