Inflation Cross-Product
An analyst is evaluating securities in a developing nation where the inflation rate is very high. As a result, the analyst has been warned not to ignore the cross-product between the real rate and inflation. If the real risk-free rate is 6% and inflation is expected to be 11% each of the next 4 years, what is the yield on a 4-year security with no maturity, default, or liquidity risk? (Hint: Refer to "The Links Between Expected Inflation and Interest Rates: A Closer Look." on Page 200.) Round your answer to two decimal places.
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Expectations Theory
One-year Treasury securities yield 2.3%. The market anticipates that 1 year from now, 1-year Treasury securities will yield 6.15%. If the pure expectations theory is correct, what is the yield today for 2-year Treasury securities? Calculate the yield using a geometric average. Round your answer to two decimal places.
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