If inflation is expected to average 4 during the next year, Financial Management

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If inflation is expected to average 4 during the next year

1. If inflation is expected to average 4% during the next year and the real rate is 3.5%, what should be the current rate of interest?

a. 6.0% b. 6.5% c. 7.0% d. 7.5% e. 8.0%

2. Bond Y is a long-term bond with an 8% interest rate. Over the life of the bond, the average expected annual inflation rate is 2%. The bond's DRP is 2% and its LP is 0.5%. The applicable maturity risk premium is 1%. What is the real risk-free rate?

a. 1.5% b. 2.0% c. 2.5% d. 3.0% e. 3.5%

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Financial Management: If inflation is expected to average 4 during the next year

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Financial Management: If inflation is expected to average 4 during the next year

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