You are given the following information: •

r* = 1.0%

The current interest rate on a 1 year loan to the U.S. government = 4.0%

The MRP on 10 year bonds = 1.0% • The LP on U.S. and Zeniba Inc. bonds = 0

The interest rate on a 10 year loan to Zeniba Inc. is 1.5 times the rate on a 10 year loan to the U.S. government

a) What is the inflation rate expected to be over the next year?

b) Suppose the annual inflation rate expected each year over the next 10 years is the same as the inflation rate expected over the next year. What should be the current interest rate on a 10 year loan to the U.S. government?

c) What is the DRP on a 10 year loan to Zeniba Inc.?

Answer rating: 100% (QA)

a The inflation rate expected to be over the next year can be calculated using the Fisher equation N... View the full answer