Suppose the real riskfree rate is 250 and the future rate of

Suppose the real risk-free rate is 2.50% and the future rate of inflation is expected to be constant at 3.05%. 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.

Solution

answer =5.55%

r = r* + IP + DRP + LP + MRP

            r = 2.50% + 3.05% = 5.55%