The real risk-free rate is 3.05%, inflation is expected to be 3.60% this year, and the maturity risk premium is zero. Ignoring any cross-product terms, i.e., if averaging is required, use the arithmetic average, what is the equilibrium rate of return on a 1-year Treasury bond?
A. 8.18%
B. 6.65%
C. 5.72%
D. 5.32%
E. 5.52%
Answer: B
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