Task 1: Average inflation
Suppose that the annual expected rates of inflation over each of the next five years are 5 percent, 6 percent, 9 percent, 13 percent, and 12 percent, respectively. What is the average expected rate of inflation over the 5-year period?
Real risk-free rate of interest
Task 2: You read in The Wall Street Journal that 30-day T-bills are currently yielding 8 percent. Your brother-in-law, a broker at Kyoto Securities, has given you the following estimates of current interest rate pre¬miums:
Inflation premium 5%
Liquidity premium 1%
Maturity risk premium 2%
Default risk premium 2%
Based on these data, the real risk-free rate of return is..??