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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 (TIPS) is 2.10%. Suppose
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 (TIPS) is 2.10%. Suppose further that the maturity risk premium on a 10-year T-bond is 0.9%, 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.2.10% c. 2.00% d. 1.80% e. 2.20% Assume that retum rate on TIP = 3%. Inflation rate is expected to be 8% in year 1,5% in year 2 and 4% thereafter. Also assume that all T-bonds are highly liquid and free of default risk. I 2-year T-bond yields 11%, what is the maturity risk premium? Select one: a. 1.00% b. 3.50% c. 1.50% e d. 0.50% e. 2.50%
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