A Treasury note with a maturity of four years carries a nominal rate of interest of 10 percent. In contrast, an eight-year Treasury bond has a yield of 8 percent.
a. If inflation is expected to average 7 percent over the first four years, what is the expected real rate of interest?
b. If the inflation rate is expected to be 5 percent for the first year, calculate the average annual rate of inflation for years 2 through c. If the maturity risk premium is expected to be zero between the two Treasuries securities, what will be the average annual inflation rate expected over years 5 through 8?
Expected average annual inflation rate for years 5, 6, 7, and 8