Question 10 In the coming year the inflation rate is expected to be 2.0 percent, but we do not know what the inflation rate will be each year after that although we are assuming it will be constant. We believe the real risk-free rate will be 2.75 percent and that the expectations theory fully explains the yield curve. If 4- year Treasury bonds yield 1.50 percentage points more than 1-year Treasury bonds, what inflation rate is expected after Year 1? A. 4.0 percent B. 3.8 percent C. 3.6 percent D. 3.4 percent E. 3.2 percent C OD 13

Question 10 In the coming year the inflation rate is expected to be 20 percent, but we do not know what the inflation rate will be each year after that athough we are assuming it will be constant. We believe the real risk-free rate will be 275 percent and that the expectations theory fully explains the vield cume. If 4 . year Treasury bonds yield 1.50 percentage points more than 1 -year Treasun bonds, what inflation rate is expected atter Year 1 ? A. 4.0 percent B. 3.8 percent C. 3.6 percent D. 3.4 percent E. 3.2 percent