Suppose the rate of return on a 10-year T-bond is currently 5.00% and that on a 10-year Treasury Inflation Protected Security (TIP) is 2.10%. Suppose further that the maturity risk premium on a 10-year T-bond is 0.9%, that no maturity risk premium is required on TIPs, and that no liquidity premiums are required on any T-bonds. Given this data, what is the expected rate of inflation over the next 10 years?
a) 1.80%
b) 2.00%
c) 1.90%
d) 2.10%
e) 2.20%
Please explain how you got your solution.