Problem:
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.
Required:
Question: If the real risk-free rate is 3% and inflation is expected to be 10% each of the next 4 years, what is the yield on a 4-year security with no maturity, default, or liquidity risk?
Note: Please provide equation and explain comprehensively and give step by step solution.