skip to Main Content
The smarter way
to do assignments.

Please note that this is just a preview of a school assignment posted on our website by one of our clients. If you need assistance with this question too, please click on the Order button at the bottom of the page to get started.

Because of a recession, the inflation rate expected for the coming year is only 3%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 3%. Assume that the real risk-free rate is r* = 2% for all maturities and that there are no maturity premiums. If 3-year Treasury notes yield 2 percentage points more than 1-year notes, what inflation rate is expected after Year 1?
Basic equation is: r t = r* IP t DRP t MRP t LP t But, DRP t = MRP t = LP t = 0 So, r t = r* IP t IP t = Average
Inflation = (I 1 I 2 I 3 ..) / N It is given that I 1 = IP 1 = 3% and r*
= 2%. Therefore, r 1 =
2% 3% = 5% 3-year
Treasury notes yield 2 percentage points more than 1-year notes. So, r 3 =
r 1 2% = 5% 2% = 7% Also, r 3 =
r* IP 3 = 2% IP 3…

e 2% IP 3 = 7% So, IP 3 = 5% It is given that It is constant after t = 1. So I 2 = I 3 =I 4 = IP 3 = (I 1 I 2 I 3 )
/ 3 Or IP 3 = (I 1 2I) / 3 5% = (3% 2I) / 3 15% = 3% 2I I = (15% – 3%) / 2 = 6% Expected inflation rate after
Year 1 is 6%

GET HELP WITH THIS ASSIGNMENT TODAY

Clicking on this button will take you to our custom assignment page. Here you can fill out all the additional details for this particular paper (grading rubric, academic style, number of sources etc), after which your paper will get assigned to a course-specific writer. If you have any issues/concerns, please don’t hesitate to contact our live support team or email us right away.

How It Works        |        About Us       |       Contact Us

© 2018 | Intelli Essays Homework Service®