Suppose the Yield on a 10-Year T-Bond Is Currently 5

question 44

Multiple Choice

Suppose the yield on a 10-year T-bond is currently 5.05% and that on a 10-year Treasury Inflation Protected Security (TIPS) is 1.80%.Suppose further that the MRP on a 10-year T-bond is 0.90%,that no MRP is required on a TIPS,and that no liquidity premium is required on any T-bond.Given this information,what is the expected rate of inflation over the next 10 years? Disregard cross-product terms,i.e. ,if averaging is required,use the arithmetic average.

• A) 2.66%
• B) 1.88%
• C) 2.35%
• D) 2.00%
• E) 2.49%

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