THE FINANCIAL ENVIRONMENT Question 1 Assume that today is January 1,2017. The rate of inflation is expected to be 4% throughout 2013. However, increased government deficits and renewed vigor in the economy are then expected to push inflation rates higher. Investors expect the inflation rate to be 5% in 2018, 6% in 2019, and 7% in 2020. The real risk-free rate, k is expected to remain at 2% over the next 5 years. Assume that no maturity risk premiums are required on bonds with 5 years or less to maturity. a What is the average expected inflation rate at the end of 4 years? What is the quoted interest rate on 4-year T-bonds? b