Suppose the rate of return on a 10-year T-bond is currently 5.00% 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 1.9%, 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.1.00%

c.0.60%

d.1.60%

e.2.00%