If the nominal interest rate for Treasury bonds is 8% and the risk-free rate is 3%, the expected inflation rate must be:
a. 3% nominal interest
b. 5% for Treasury bonds
c. 11%
d. cannot be determined without additional information
Answer :
D, cannot be determined
179-80
r = RR + IP + DRP + MRP + LP and risk-free rate = RR + IP = 3%
DRP and LP are 0, MRP > 0 ? 8% = RR + IP + MRP = 3% + MRP ? MRP = 5% but you need to know RR to be able to calculate IP
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