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the real risk-free rate is 3.05%, inflation is expected to be 2.75% this year, and the maturity risk premium is zero. ignoring any cross-product terms, what is the equilibrium rate of return on a 1-year treasury bond?

Answer :

Abiolataiwo2015go

If the real risk-free rate is 3.05%, inflation is expected to be 2.75% this year, and the maturity risk premium is zero. ignoring any cross-product terms, The equilibrium rate of return on a 1-year treasury bond is:  5.884%.

How to find the  equilibrium rate of return ?

Using this formula to determine the equilibrium rate of return

rrf = (1+r) (1+IP) - 1

Where:

Real risk-free rate (r) = 3.05%

Inflation this year (IP) = 2.75%

Let plug in the formula

Equilibrium rate of return  = (1 + 3.05%) × (1+2.75%) - 1

Equilibrium rate of return  = ( 1 + 0.0305) × ( 1+ 0.0275) -1

Equilibrium rate of return  = (1.0305) × (1.0275) -1

Equilibrium rate of return  = 1.05884 -1

Equilibrium rate of return  = 0.05884 × 100

Equilibrium rate of return  = 5.884%

Therefore the Equilibrium rate of return  is 5.884%.

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