Question: What is the process for b. and c.? The answers are given but I dont understand how ro work them. Show work please. 1. Assume

What is the process for b. and c.? The answers are given but I dont understand how ro work them. Show work please.

1. Assume that it is January 1, 2021. Inflation is expected to be 2% throughout 2021, but then it is expected to be 2.5% in 2022, 2.7% in 2023, and 4% in 2024. The real risk-free rate is expected to remain constant at 3% over the next 5 years. Assume that no maturity risk premiums exist on bonds with 5 years or less to maturity. The current interest rate on 5-year T-bonds is 6 percent. a. Calculate the average expected inflation rate over the next 4 years, Ans: 2.8% k+=3 2 +2.5+ 2.7 +9 4 = 2.8% 0 b. Calculate the interest rate for a 4-year T-bond, Ans: 5.8% 2 13 c. What is the implied expected inflation rate for 2025? Ans: 3.8% K

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