At the beginning of Year 1, you, as an investor, expected inflation to be 2.4% in Year 1, 3.1% in Year 2, 3.5% in Year3, 4.4% each year thereafter.

a) What was the average expected inflation rate over the five-year period ( year 1- Year 5) ? Use the arithmetic average.

b) Over the five-year period, what average nominal interest rate would be expected to produce a 2% real risk-free return on 5-year Treasury securities? Assume MRP = 0.

c) Assuming a real risk-free rate of 2% and a maturity risk premium that equals 0.2 x (t) %, where t is the number of years to maturity, estimate the interest rate at the beginning of year 1 on bonds that mature in 1,2,5, and 10 years. Draw a yield curve based on these data.

d) Describe the economic conditions that could lead to an upward-sloping yield curve.

e) if you expected the inflation rate for every future year to be 3%, i.e., I1 = I2=...=I = 3, what would the yield curve have looked like? Consider all the factors that are likely to affect the curve.