Assuming the same coupon rate and maturity length,when the interest rate on a Treasury Inflation Protected Security is 3 percent,and the yield on a nonindexed Treasury bond is 8 percent,the expected rate of inflation is
A) 3 percent.
B) 5 percent.
C) 8 percent.
D) 11 percent.

Question

Quizplus · Accepted Answer

The difference between the interest rates of the TIPS and the nonindexed Treasury bond is 5 percent (8% - 3%). This difference is the compensation that investors receive for the expected inflation rate. Therefore, the expected rate of inflation is 5 percent.

Assuming the Same Coupon Rate and Maturity Length,when the Interest