Question: A 5-year Treasury bond has a 5% yield. A 10-year Treasury bond has a 6% yield. The market expects that inflation will average 2.5% over

A 5-year Treasury bond has a 5% yield. A 10-year Treasury bond has a 6% yield. The market expects that inflation will average 2.5% over the next 10 years. Assume that there is no maturity risk premium (MRP = 0), and that the annual real risk-free rate of interest, r*, will remain constant over the next 10 years. What does the market expect that inflation will average over the next five years?

A. 1.0 percent
B. 2.0 percent
C. 2.5 percent
D. 1.5 percent
E. 3.5 percent

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