Question 15:

Part A:

An analyst is evaluating securities in a developing nation where the inflation rate is very high. As a result, the analyst has been warned not to ignore the cross-product between the real rate and inflation. A 6-year security with no maturity, default, or liquidity risk has a yield of 14.40%. If the real risk-free rate is 4%, what average rate of inflation is expected in this country over the next 6 years? (Hint: Refer to "The Links Between Expected Inflation and Interest Rates: A Closer Look"Links to an external site..) Do not round intermediate calculations. Round your answer to the nearest whole number. ___%

Part B:

One-year Treasury securities yield 4.25%. The market anticipates that 1 year from now, 1-year Treasury securities will yield 4.7%. If the pure expectations theory is correct, what is the yield today for 2-year Treasury securities? Calculate the yield using a geometric average. Do not round intermediate calculations. Round your answer to two decimal places. ____%

This is the only question I am stuck on for my weekly homework, and I just need to learn how to do this for the exam. Please assist me as this class is painfully terrible. I need both parts of the question to get it right. Thank you so much.