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1 September, 20:21

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?

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  1. 1 September, 23:24
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    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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