Assume the Real Rate of Interest on 1-Year, 10-Year, and 30-Year

question 253

Essay

Assume the real rate of interest on 1-year, 10-year, and 30-year bonds is 3%. Also assume the rate of
inflation is expected to be 3% for the coming year. Considering only an inflation premium, construct
an example showing how an expected increase in the rate of inflation leads to an upward sloping
term structure via the Fisher effect. Then, explain how the addition of interest rate risk will affect
your results.

---

Definitions:

Homesteads

Land and the dwelling (or dwellings) on that land where a family makes its home, historically associated with government grants to settlers for farming in the American West.

Economic Independence

The state of having sufficient personal wealth to live, without having to work actively for basic necessities, allowing an individual financial freedom.

Antislavery Sentiment

The attitude, movement, or ideology opposing slavery, advocating for its abolition, and supporting freedom for enslaved people.

Abolitionist Ranks

Individuals and groups actively involved in the movement to end slavery and the slave trade throughout the 18th and 19th centuries.