Suppose the Rate of Return on a 10-Year T-Bond Is

question 5

Multiple Choice

Suppose the rate of return on a 10-year T-bond is 4.05%,the expected average rate of inflation over the next 10 years is 2.0%,the MRP on a 10-year T-bond is 0.9%,no MRP is required on a TIPS,and no liquidity premium is required on any Treasury security.Given this information,what should the yield be on a 10-year TIPS? Disregard cross-product terms,i.e. ,if averaging is required,use the arithmetic average.

• A) 1.41%
• B) 1.15%
• C) 1.22%
• D) 1.05%
• E) 1.17%

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