Posted by **vincent** on Thursday, September 6, 2012 at 4:54pm.

A Treasury note with a maturity of four years carries a nominal

rate of interest of 10 percent. In contrast, an eight-year Treasury

bond has a yield of 8 percent.

a. If inflation is expected to average 7 percent over the first four

years, what is the expected real rate of interest?

b. If the inflation rate is expected to be 5 percent for the first

year, calculate the average annual rate of inflation for years

2 through 4.

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