Problem:
Suppose the real risk-free rate is 4.20%, the average expected future inflation rate is 6.50% and a maturity risk premium of 0.10% per year to maturity applies, i.e., MRP = 0.10 % (t), where t is the years to maturity, hence the pure expectations theory is NOT valid.
Requirement:
Question: What rate of return would you expect on a 4-year Treasury security? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average
Note: Please provide reasons to support your answer.