Suppose the real risk-free rate of interest is r* =5% r*=5% and it is expected to remain constant over time. Inflation is expected to be 1.40% per year for the next two years and 3.50% per year for the next three years. The maturity risk premium is 0.1×(t−1)% 0.1×t−1%, where t t is number of years to maturity, a liquidity premium is 0.55%, and the default risk premium for a corporate bond is 1.30%.

If the yield on a 5-year Treasury bond is 8.06% and the yield on a 6-year Treasury bond is 8.53%, the expected inflation in 6 years is_________ . (Hint: Do not round intermediate calculations.)

Answer rating: 100% (QA)

To calculate the expected inflation in 6 years we can use the information provided and the relations... View the full answer