According to economists' forecasts, inflation is expected to be 2 percent next year (Year 1); it is expected to be 1.2 percent the following year (Year 2); it is expected to be 1.6 percent the year after that (Year 3); and it is expected to be 2.1 percent every year thereafter (i.e., every year after Year 3). Assume the real risk-free rate, r*, is 2.5 percent for all maturities. What should be the nominal risk-free rate on bonds that mature in

(a)one year
(b)three years
(c)five years, and
(d)15 years?

Answer rating: 100% (QA)

To determine the nominal riskfree rates on bonds of different maturities we need to consider the real riskfree rate and the expected inflation rates f... View the full answer