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Question
Assume investors demand a real rate of return equal to 3 percent and that there is no maturity risk premium associated with Treasury securities. According to the Wall Street Journal, the average nominal yields on risk-free Treasury securities with different maturities are:
Type of security Yield
1-year 4.5%
2-year 4.6
3-year 4.8
4-year 5.0
What is the one-year nominal interest rate and the inflation premium that is expected in Year 4?
a. 5.0%; 2.0%
b. 4.5%; 1.5%
c. 3.0%; 1.8%
d. 5.6%; 2.6%
e. There is not enough information to answer this question.
Answer
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