The Determinants of Market Interest Rates
Problem 6-16
Inflation Cross-Product
An analyst is evaluating securities in a developing nation where the inflation rate is very high. As a result, the analyst has been warned not to ignore the cross product between the real rate and inflation. A 6-year security with no maturity, default, or liquidity risk has a yield of 20.8%. If the real risk-free rate is 5.75%, what average rate of inflation is expected in this country over the next 6 years? Round your answer to two decimal places. (Hint: Refer to "The Links between Expected Inflation and Interest Rates: A Closer Look.") %