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?

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?

A. To calculate the expected real rate of interest, we need to adjust the nominal rate of interest for inflation. The real rate of interest is the nominal rate of interest minus the inflation rate.

In this case, the nominal rate of interest is given as 10%, and the expected average inflation rate over the first four years is 7%. Therefore, the expected real rate of interest can be calculated as:
Real rate of interest = Nominal rate of interest - Inflation rate
Real rate of interest = 10% - 7%
Real rate of interest = 3%

Therefore, the expected real rate of interest over the first four years is 3%.

B. To calculate the average annual rate of inflation for years 2 through 4, we need to consider the inflation rate for each individual year and then calculate the average.

Given that the inflation rate for the first year is expected to be 5%, we have the following expected inflation rates for the next three years (years 2 through 4):
Year 2: Unknown
Year 3: Unknown
Year 4: Unknown

To calculate the average annual rate of inflation, first, we need to know the total increase in prices over the three-year period. We can calculate this by subtracting the initial price level from the final price level and dividing it by the initial price level.

Let's assume that the initial price level is 100. Since the inflation rate for the first year is 5%, the final price level at the end of year 1 would be:

Final price level = Initial price level + (Initial price level * Inflation rate)
Final price level = 100 + (100 * 0.05)
Final price level = 100 + 5
Final price level = 105

Now, to calculate the average annual rate of inflation for years 2 through 4, we divide the total increase in prices by the initial price level and express it as a percentage.

Average inflation rate = (Final price level - Initial price level) / Initial price level * 100
Average inflation rate = (105 - 100) / 100 * 100
Average inflation rate = 5 / 100 * 100
Average inflation rate = 5%

Therefore, the average annual rate of inflation for years 2 through 4 is 5%.

C. To calculate the average annual inflation rate expected over years 5 through 8, we need to consider the inflation rate for each individual year and then calculate the average.

However, the question didn't provide any information about the expected inflation rates for years 5 through 8. Therefore, we cannot determine the average annual inflation rate expected over that period without additional information.