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The real risk-free rate of interest is 3 percent inflation

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?

a. 18 %

b. 12 %

c. 6 %

d. 8 %

e. 10 %

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Finance Basics: The real risk-free rate of interest is 3 percent inflation

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