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If the maturity risk premium is expected to be zero between

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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 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? 

Reference no: EM13972538

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