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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 fort he 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 years 5 through 8?