1. Assume investors expect a 2.0 percent real rate of return over the
next year. If inflation is expected to be 0.5 percent, what is the
expected nominal interest rate for a one-year U.S. Treasury security?
To determine the expected nominal interest rate for a one-year U.S. Treasury security, you need to add the expected inflation rate to the expected real rate of return.
Given that investors expect a 2.0% real rate of return and inflation is expected to be 0.5%, the formula to calculate the expected nominal interest rate is:
Nominal interest rate = Real rate of return + Inflation rate.
Substituting the given values into the formula, we get:
Nominal interest rate = 2.0% + 0.5% = 2.5%.
Therefore, the expected nominal interest rate for a one-year U.S. Treasury security is 2.5%.