Assume the real rate of interest on 1-year, 10-year, and 30-year bonds is 3%. Also assume the rate of
inﬂation is expected to be 3% for the coming year. Considering only an inﬂation premium, construct
an example showing how an expected increase in the rate of inﬂation leads to an upward sloping
term structure via the Fisher effect. Then, explain how the addition of interest rate risk will affect
your results.

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The Answer of Assume the real rate of interest on 1-year, 10-year, and 30-year bonds is 3%. Also assume the rate of
inﬂation is expected to be 3% for the coming year. Considering only an inﬂation premium, construct
an example showing how an expected increase in the rate of inﬂation leads to an upward sloping
term structure via the Fisher effect. Then, explain how the addition of interest rate risk will affect
your results.

Assume the Real Rate of Interest on 1-Year, 10-Year, and 30-Year