Question: A Treasury note with a maturity of four years carries

A Treasury note with a maturity of four years carries a nominal rate of interest of 10 percent. In contrast, an 8-year Treasury bond has a yield of 8 percent.
a. If inflation is expected to average 7 percent over the first four years, what is the expected real rate of interest?
b. If the inflation rate is expected to be 5 percent for the first year, calculate the average annual rate of inflation for years two through four.
c. If the maturity risk premium is expected to be zero between the two Treasury securities, what will be the average annual inflation rate expected over years five through eight?

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  • CreatedMarch 27, 2015
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