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Assume the real rate of interest on 1-year, 10-year, and 30-year bonds are 3%. Also, assume the rate of inflation is expected to be 3%
Assume the real rate of interest on 1-year, 10-year, and 30-year bonds are 3%. Also, assume the rate of inflation is expected to be 3% for the coming year. Considering only an inflation premium, construct an example showing how an expected increase in the rate of inflation leads to an upward-sloping term structure via the Fisher effect. Then, explain how the addition of interest rate risk will affect your results.
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