Expect the rate of inflation

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Suppose you expect the rate of inflation to be 4 % next year, then fall to 3 % for the following year, and then to fall to 2 % for each of the following years. Suppose r * is to remain constant at 2 % and the maturity risk premium is 0 for the 1 s t year, . 1 0% for the 2 nd year, and will increase by . 1 0% for each following year, up to a limit of 1.0%. Calculate the interest rate ( r ) on the following term bonds: a) 1 - year__________________ b) 5 - year______ ____________ c) 10 - year__________________ d) 15 - year__________________ e) 20 - year________________.

Reference no: EM131446774

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