Assume that the real, risk-free rate of interest is expected to be constant over time at 3 percent, and that the annual yield on a 6-year corporate bond is 8.00 percent, while the annual yield on a 10-year corporate bond is 7.75 percent: you may assume that the default risk and liquidity premium are the same for both bonds. Also assume that the maturity risk premium for all securities can be estimated as MRP, (0.1%) *(t-1), where t is the number of periods until maturity. Finally assume that inflation is expected to be constant at 3 percent for Years 1-6, and then constant at some rate for Years 7-10 (4 years). Given this information, determine what the market must anticipate the average annual rate of inflation will be for Years 7-10. = 2.583% O 1.979% 2.281% O 1.375% O 1.677% K

Assume that the real, risk-free rate of interest is expected to be constant over time at 3 percent, and that the annual yield on a 6 -year corporate bond is 8.00 percent, while the annual yield on a 10 -year corporate bond is 7.75 percent: you may assume that the default risk and liquidity premium are the same for both bonds. Also assume that the maturity risk premium for all securities can be estimated as MRPt=(0.1%)(t1), where t is the number of periods until maturity. Finally assume that inflation is expected to be constant at 3 percent for Years 1-6, and then constant at some rate for Years 710 ( 4 years). Given this information; determine what the market must anticipate the average annual rate of inflation will be for Years 7-10. 2.583% 1979% 2.281% 1.375% 1.677%