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Suppose the rate of return on a 10-year T-bond is currently 9.00% and that on a 10-year Treasury Inflation Protected Security (TIP) is 1.50%. Suppose
Suppose the rate of return on a 10-year T-bond is currently 9.00% and that on a 10-year Treasury Inflation Protected Security (TIP) is 1.50%. Suppose further that the maturity risk premium on a 10-year T-bond is 2.9%, that no maturity risk premium is required on TIPs, and that no liquidity premiums are required on any T-bonds. Given this data, what is the expected rate of inflation over the next 10 years? Select one: a. 1.90% b. 6.00% C. 4.60% d. 1.60% e. 5.00% Assume that return rate on TIP = 4.5%. Inflation rate is expected to be 7% in year 1,6% in year 2, and 4% thereafter. Also assume that all T-bonds are highly liquid and free of default risk. If 2-year T-bond yields 14.5%, what is the maturity risk premium? Select one: a. 0.5% b. 3.5% c. 2.5%
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