Question
The real rate of interest is 1.9% and expected to stay constant. The table below shows information for two bonds: Years to maturity Expected inflation
The real rate of interest is 1.9% and expected to stay constant. The table below shows information for two bonds:
| Years to maturity | Expected inflation premium | Risk premium | |
|---|---|---|---|
| Bond A | 10 | 2.6% | 2.5% |
| Bond B | 20 | 4% | 1% |
Attempt 1/3 for 10 pts.
Part 1
According to the pure expectations theory, what average annual inflation rate do investors expect between 10 and 20 years from now?
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Guardians Of Finance
Authors: James R. Barth, Gerard Caprio, Ross Levine
1st Edition
0262526840, 978-0262526845
