Use the arithmetic average

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Reference no: EM131014274

Suppose the rate of return on a 10-year T-bond is 6.85%, the expected average rate of inflation over the next 10 years is 2.0%, the MRP on a 10-year T-bond is 0.9%, no MRP is required on a TIPS, and no liquidity premium is required on any Treasury security. Given this information, what should the yield be on a 10-year TIPS? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.

4.86%

3.95%

4.38%

4.58%

4.62%

Reference no: EM131014274

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