Suppose that it is january 2 during the next three years

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Suppose that it is January 2. During the next three years, economists project that inflation will be 3 percent, 4 percent, and 8 percent, respectively; every year thereafter, inflation is expected to settle at 2 percent. It is estimated that a maturity exists on Treasury securities that equal 0.1 percent for each year that remains until the maturity of a bond. To yield a real risk-free rate, r*, equal to 3 percent,

(a) What would the average nominal interest rate on a five-year Treasury bond have to be?

(b) What would the average nominal rate have to be for a 10-year Treasury bond with the same characteristics?

Reference no: EM13618598

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