Homework 4

Homework 4 - Finance Homework 4 ARE 171A Winter 2011 A....

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Finance Homework 4 ARE 171A Winter 2011 A. Havenner 1. TIPS are Treasury Inflation Protected Securities. They were created at least in part to provide a market forecast of inflation for policymaking. Since TIPS are (at least in principle) hedged perfectly against inflation, their yield is the real interest rate. Combining this rate with a nominal interest rate for comparable maturity U.S. borrowing allows computation ofthe implicit marketforecast ofinflation. [8] i) On January 25, 2011, the yield to maturity on 30 year TIPS was 2.058%, while the comparable non-TIPS 30 year Treasury was 4.61%. What is the market forecast of the annual rate of inflation over the next 30 years? ii) On January 25, 2011, the yield to maturity on 10 yearTIPS was 1.150%, while the comparable non-TIPS 30 year Treasury was 3.42%. What is the market forecast of the annual rate of inflation over the next 10 years? iii) On January 25, 2011, the yield to maturity on 5 year TIPS was -.008% (negative), while the comparable non-TIPS 5 year Treasury was 2.01 %. What is the market forecast of the annual rate of
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This note was uploaded on 02/27/2012 for the course ARE 171A taught by Professor Whitney during the Spring '08 term at UC Davis.

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Homework 4 - Finance Homework 4 ARE 171A Winter 2011 A....

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