Question:
With the following data, find the expected rate of inflation during the next year.
- k* = real risk free rate = 3%
- Maturity risk premium on 10-year T-bonds = 2%. It is zero on 1-year bonds, and a linear relationship exists.
-Default risk premium on 10-year, A-rated bonds = 1.5%
-Liquidity premium = 0%
-Going interest rate on 1-year T-bonds = 8.5%