Question

The YTMs for Treasuries with differing maturities (with each rate expressed as an annual rate) on a recent day were as shown in the following table.

3 MONTHS	1.41%
6 MONTHS	1.71%
2 YEARS	2.68%
3 YEARS	3.01%
5 YEARS	3.70%
10 YEARS	4.51%
30 YEARS	5.25%

The real rate of interest is 0.8% per year. Use the information in the preceding table to calculate the approximate inflation expectation for each maturity.

Answer 1

Inflation. =[(1+nominal interest)/(1+real interest)]-1

1+real interest =(1+.008)=1.008

Period Inflation

3 months. [(1+.0141/1.008)]-1=0.006052 or 0.6052%

6 months. [ (1+0.0171)/1.008]-1=.00902 or 0.902%

2years. [(1+0268)/1.008]-1=.01865 or 1.865%

3 years. [ (1+.0301)/1+.008]-1=0.02192 or 2.192%

5years. [ (1+0370)/1.008]-1=.02877 or 2.87%

10 years. [ (1+0.0451)/1.008]-1=.03681 or 3.681%

30 years. [ (1+0.0525)/1.008]-1=.04415 or 4.415%