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Question
Given the following data, find the expected rate of inflation during the next year.
r* = real risk-free rate = 3%.
Maturity risk premium on 10-year T-bonds = 2%. It is zero on 1-year bonds, and a linear relationship exists.
Default risk premium on 10-year, A-rated bonds = 1.5%.
Liquidity premium = 0%.
Going interest rate on 1-year T-bonds = 8.5%.
a. 3.5%
b. 4.5%
c. 5.5%
d. 6.5%
e. 7.5%
Answer
This answer is hidden. It contains 56 characters.
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