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What is the bond market predicting about rate of inflation

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Current yield on 10 year and 30 year U.S. treasury securities are 2.57% and 3.28% respectively. Using equation 5-6 on pages 206 to 207. Assume the default risk premium (DRP) and liquidity premium (LP) are zero.

Answer the following questions.

1. What is the bond market predicting about the rate of inflation in the next 10 to 30 years?

2. What is the bond market predicting about the real-risk free rate of inflation in the next 10 to 30 years? 

3. Would you invest $1000 today in a 30 year treasury security at current rates? Explain you answer.

4. Do you think the assumption of the default risk premium being zero is a good assumption? Explain your answer.

Reference no: EM13720760

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