For the next four years, inflation is expected to be 3% annually. For the four years after that, it is expected to be 4% annually.
a) Calculate the inflation premium for a bond maturing in 6 years. Show your work in exquisite detail.
b) If the real risk-free rate is 80 bps, what is the required interest rate on a 6-year Treasury security? Explain your answer.
c) Calculate the inflation premium for a bond maturing in 8 years. Show your work.
D) If the real risk-free rate is 80 bps, what is the required interest rate on an 8-year Treasury security? Explain your answer.