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3. Consider the following term structure of spot (nominal) interest rates: Term 0.5 years 1 year Rate (Semi-annual compounding) 5.00% p.a. 5.50% p.a. Suppose that
3. Consider the following term structure of spot (nominal) interest rates: Term 0.5 years 1 year Rate (Semi-annual compounding) 5.00% p.a. 5.50% p.a. Suppose that the real interest rate is expected to remain at 2% p.a., semi-annual compounding forever. What are inflation rates that you expect over the next six months (i.e., month 1 to month 6) and the following six months (i.e., month 7 to month12)?
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