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12. 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.
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?

  • finance -

    12. 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.
    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?

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