Question

n late 1980 the US. Commerce Department released new data showing n ation was 15% At he me he prime rate of interest was 21 % a record ni n However, many nvestors expected the new Reagan administration to be more effective in controlling inflation than the Carter administration had been. Moreover, many observers believed that the extremely high interest rates and generally tight credit, which resulted from the Federal Reserve System's attempts to curb the inflation rate, would lead to a recession, which, in turn, would lead to a decline in inflation and interest rates. Assume that at the beginning of 1981, the expected inflation rate for 1981 was 12%; for 1982, 996; for 1983, 7%; and for 1984 and thereafter, 696 a. What was the average expected infiation rate over the 5-year period 1981 1985? Round your answer to two decimal places. (Use the arithmetic average.) b. Over the 5-year period, what average nominal interest rate would be expected to produce a 2% real risk-free return on 5-year Treasury securities? Assume MRP-0. Round your answer to two decimal places C. Assuming a real risk-free rate of 2% and a maturity risk premium that equals 0.1 x (t)%, where t is the number of years to maturity, estimate the interest rate in January 1981 on bonds that mature in 1 year. Round your answer to two decimal places. 0%% Assuming a real risk-free rate of 2% and a maturity risk premium that equals 0.1 x (t)%, where t is the number of years to maturity, estimate the interest rate in January 1981 on bonds that mature in 2 years. Round your answer to two decimal places. x(t)% where t is the number of years to maturity, Assuming a real risk-free rate of 2% and a maturity risk premium that equals 0.1 bonds that mature in 3 years. Round your answer to two decimal places. es mate the interest rate anuary 31 r