Question $2$

$0\mathrm{.}25$ pts

The annual yield on a $4-$year corporate security is $6\mathrm{.}875$ percent, while the annual yield on a $6-$year corporate security is $7\mathrm{.}90$ percent. Assume that the real, risk$-$free rate of interest is expected to be constant over time at $2$ percent, the default risk and liquidity premium on both securities is equal to $1\mathrm{.}75$ percent. Also assume that the maturity risk premium for all securities can be estimated as $MR{P}_t=(0\mathrm{.}15\%{)}^{**}(t-1),$ where $t$ is the number of periods until maturity.

Your analysis shows that the expected rate of inflation for Year $2$ is $2\mathrm{.}0$ percent, for Year $3$ is $2\mathrm{.}5\%,$ for Year $4$ is $3\mathrm{.}5$ percent. Further, the expected rate of inflation for Year $5$ is $4\mathrm{.}50$ percent. Determine the anticipated the rate of inflation for Year $6.$

$5\mathrm{.}20\%$

$4\mathrm{.}60\%$

$5\mathrm{.}50\%$

$4\mathrm{.}30\%$

$4\mathrm{.}90\%$