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A 5-year Treasury bond has a 5 percent yield. A 10-year Treasury bond has a 6 percent yield. A 10-year corporate bond has an 8 percent yield. The...

A 5-year Treasury bond has a 5 percent yield. A 10-year Treasury bond has a 6 percent yield. A 10-year corporate bond has an 8 percent yield. The market expects that inflation will average 2.5 percent over the next 10 years (IP10 = 2.5 percent). Assume that there is no maturity risk premium (MRP = 0), and that the annual real risk-free rate of interest, k*, will remain constant over the next 10 years. (Hint: Remember that the default risk premium and the liquidity premium are zero for Treasury securities: DRP = LP = 0). What does the market expect that inflation will average over the next five years?

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