Arithmetic average to find the expected rate of inflation


Question: Assume the rate of return on a ten year T-bond is currently 5.00 percent and that on a ten year Treasury Inflation Protected Security (TIP) is 2.10 percent. Suppose further that the MRP on a 10-year T-bond is 0.9%, that no MRP is required on TIPs, and that no liquidity premiums are required on any T-bonds. Given this data, determine the expected rate of inflation over the next ten years? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.
[A] 2.00%
[B] 2.10%
[C] 2.20%
[D] 1.80%
[E] 1.90%

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Finance Basics: Arithmetic average to find the expected rate of inflation
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