Average annual inflation rate expected by investors

Reference no: EM1314897

Q. A thirty- yr U. S. Treasury bond has a 4.0 percent interest rate. In contrast, a ten- yr Treasury bond has an interest rate of 2.5 percent. A maturity risk premium is estimated to be 0.2 percentage points for the longer maturity bond. Investors expect inflation to average 1.5 percentage points over the next ten yrs.

a. Estimate the expected real rate of return on the ten- yr U. S. Treasury bond.

b. If the real rate of return is expected to be the same for the thirty- yr bond as for the ten- yr bond, estimate the average annual inflation rate expected by investors over the life of the thirty- yr bond.

Reference no: EM1314897

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