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The equilibrium rate of return on a 1 year T-bond is 5%
This is the interest rate at which the demand meet the supply at a particular point.
This is the sum of dividend yield plus the rate of capital gains.
we can also say that the equilibrium rate for a 1 year T-bond in this case is the sum of the real risk free rate and the expected inflation.
Data
Hence, the equilibrium rate of return will be 3% + 2% = 5%.
From the above, the equilibrium rate of return is 5%
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