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Consider two government bonds. Both of them have a maturity of one year. The first bond is a real-return bond with a coupon rate of
Consider two government bonds. Both of them have a maturity of one year. The
first bond is a real-return bond with a coupon rate of 2% per year, payable once a year. It is
currently selling at par. The second bond is a regular bond with a coupon rate of 5% per year,
payable once a year. Its current price is $992. What is the expected inflation rate for the next
12 months, as implied by the prices of the two bonds?
solve using yield for bond b, real return for bond A and then equating nominal return. Use continuous compounding only
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