Suppose the real risk-free rate is 2.50% and the future rate of inflation is expected to be constant at 2.80%.What rate of return would you expect on a 5-year Treasury security,assuming the pure expectations theory is valid? Disregard cross-product terms,i.e. ,if averaging is required,use the arithmetic average.
A) 5.30%
B) 4.82%
C) 6.25%
D) 5.35%
E) 6.15%

Question

Quizplus · Accepted Answer

According to the Fisher equation, the nominal interest rate (expected rate of return on a Treasury security) is approximately the sum of the real risk-free rate and the expected inflation rate. Therefore, 2.50% (real risk-free rate) + 2.80% (expected inflation rate) = 5.30%.

Suppose the Real Risk-Free Rate Is 2