What is the expected rate of return on a 3-year Treasury security? Real risk-free rate (r*)...

  

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What is the expected rate of return on a 3-year Treasury security? Real risk-free rate (r*) = 3.5% Expected inflation rates: Yr 1 = 5.0%, Yr 2 = 4.0%, Yr 3 = 3.3%, Yr 4 = 3.0%, Yr 5 and after = 2.2% Liquidity premium (LP) = 0.4% Maturity risk premium (MRP) = 0.10 x (t-1) % Default risk premium (DRP) = 2.0% What is the expected rate of return on a 3-year Treasury security? Real risk-free rate (r*) = 3.5% Expected inflation rates: Yr 1 = 5.0%, Yr 2 = 4.0%, Yr 3 = 3.3%, Yr 4 = 3.0%, Yr 5 and after = 2.2% Liquidity premium (LP) = 0.4% Maturity risk premium (MRP) = 0.10 x (t-1) % Default risk premium (DRP) = 2.0%

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Answer To calculate the expected rate of return on a 3year Treasury security we need to consider several factors including the real riskfree rate expected inflation rates liquidity premium maturity ri... View the full answer