A treasury note with a maturity of four years carries a nominal rate of interest of 10%. In contrast, an eight year treasury bond has a yeild of 8%.

Question

A. If inflation is expected to average 7% over the first four years,what is the expected real rate of interest.
B. If inflation rate is expected to be 5% for the first year, calculate the average annual rate of inflation for years 2 through 4.
C. If the maturity risk premium is expected to be zero between the two treasury securities, what will be the average annual inflation rate expected over 5 through 8?

Answer 1

A treasury note with a maturity of four years carries a nominal rate of interest of 10%. In contrast, an eight year treasury bond has a yeild of 8%.
A. If inflation is expected to average 7% over the first four years,what is the expected real rate of interest.
B. If inflation rate is expected to be 5% for the first year, calculate the average annual rate of inflation for years 2 through 4.
C. If the maturity risk premium is expected to be zero between the two treasury securities, what will be the average annual inflation rate expected over 5 through 8?

Answer 2

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