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.)

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%

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Ritushar Ritushar · Answer 2 · 2019-09-19T13:30:03+02:00

The Equilibrium rate of return on a 1-year Treasury bond formula is 7.278%

Further Explanation:

Treasury bond: It is a debt security issued by the government in which the owner receives interest until maturity, and the principal amount is paid at the maturity. This type of bonds is issued by the government in order to raise the funds from the public. The government uses the fund in the public interest. The formula for calculating the equilibrium rate of return is:

Equilibrium rate of return = (1 + r) (1 + i) - 1

Where,

r = real risk-free rate

i = inflation expected

Calculate the equilibrium rate of return:

Equilibrium rate of return = (1 + 0.0355) (1 + 0.036) – 1

= 1.07278 – 1

= 0.07278 or 7.278%

Therefore, the equilibrium rate of return on a 1-year treasury bond is 7.278% .

Learn more:

1. Learn more about the tax-free bond

https://brainly.com/question/1442514

2. Learn more about the interest value

https://brainly.com/question/5993991

3. Learn more about the trade-off

https://brainly.com/question/5057443

Answer details:

Grade: High School

Subject: Financial Management

Chapter: Risk and return

Keywords: The, real, risk-free, rate, is, 3.55%, inflation, is, expected, to, be, 3.60%, this, year, the, maturity, risk, premium, is, zero, the, cross-product, term, the, equilibrium, rate, of return, on a 1-year, treasury, bond.