Question:

A ten-year Treasury bond currently yields 7 percent. The real risk-free rate of interest, r*, is 3.1%. The maturity risk premium has been estimated to be 0.1%(t - 1), where t = the maturity of the bond (that is, for a three-year bond the maturity risk premium is 0.2 percent or 0.002.) Inflation is expected to average 2.5 percent a year for each of the next five years. What is the expected average rate of inflation between years five and ten?

A ten-year Treasury bond currently yields 7 percent. The real risk-free rate of interest, r*, is 3.1%. The maturity risk premium has been estimated to be 0.1%(t - 1), where t = the maturity of the bond (that is, for a three-year bond the maturity risk premium is 0.2 percent or 0.002.) Inflation is expected to average 2.5 percent a year for each of the next five years. What is the expected average rate of inflation between years five and ten?

## This question was asked on Mar 16, 2010.

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