The real risk-free rate of interest is 3 percent. Inflation is expected to be 4 percent this coming year, jump to 5 percent next year, and increase to 6 percent the year after (Year 3). According to the expectations theory, what should be the interest rate on 3-year, risk-free securities today?

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According to the expectations theory the interest rate on a 3year riskfree security today is determi... View the full answer