Suppose you and other investors expect that inflation will be 4% next year, to rise...
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Suppose you and other investors expect that inflation will be 4% next year, to rise to 5% during the following year, and then to remain at 5.9% thereafter. Further, you expect that the real risk free rate of interest will remain at 2% and the maturity risk premium on treasury securities will rise from 2% for one year bonds. Maturity risk premiums are expected to increase 0.2% for each year to maturity up to a limit of 1.0 percentage point on 5-year or longer term T-bonds. What is the return on a 4-year bond? Write your answer as a percentage i.e. 8 is 8%
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