A thirty-year U.S. Treasury bond has a 4.0 percent interest rate. In

contrast, a ten-year Treasury bond has an interest rate of 2.5 percent.

A maturity risk premium (MRP) is estimated to be 0.2 percentage

points for the longer maturity bond. Investors expect infl ation to

average 1.5 percentage points over the next ten years.

a. Estimate the expected real rate of return on the ten-year U.S.

Treasury bond.

b. If the real rate of return is expected to be the same for the

thirty-year bond as for the ten-year bond, estimate the average

annual infl ation rate expected by investors over the life of

the thirty-year bond.