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QUESTION

Suppose the rate of return on a 10-year T-bond is currently 5.00% and that on a 10-year Treasury Inflation Protected Security(TIPS) is 2.

Suppose the rate of return on a 10-year T-bond is currently 5.00% and that on a 10-year Treasury Inflation Protected Security(TIPS) is 2.10%. Suppose further that the maturity risk premium on a 10-year T-bond is 0.9%, that no maturity risk premium is required on TIPS, and that no liquidity premiums are required on any T-bonds. Given this data, what is the expected rate of inflation over the next 10 years?a) 1.80%b) 1.90%c) 2.10%d) 2.20%e) 2.00%

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