What the change in required real rate of return

Reference no: EM132199629

Question - Between Tuesday Oct.2 and Friday Oct. 5 the YTM on ten year Treasury Notes increased from 3.07 % to 3.24%. Meanwhile, the YTM of Treasury Inflation Protection Notes (TIPS) increased from .967% to 1.106%.

At the same time, data on the US economy showing continued strong growth in employment and further decreases in the unemployment rate was released. The chair of the Federal Reserve declared that the Fed was expecting the unemployment rate to stay below 4% and inflation to remain close to 2% from now through the end of 2020.

A) What does the data on 10 year Treasury TIPS and regular 10- year Treasury notes suggest about the change in market expectations of inflation during the period from Oct. 2 to Oct 5? Give a numerical answer if possible and explain your reasoning.

B) What does the data suggest about the change in required real rate of return on 10 year Treasury securities? Explain.

c) What assumption must you make about the required real rate of return on Tips relative to the required real rate of return on US Treasuries of similar maturity in order to derive your answer to part (a)?

Reference no: EM132199629

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