Long-run inflation expectations in the capital markets can be estimated by:
A) subtracting a real return component from the rate on short-term Treasury bills
B) adding a real return component to interest rates on long-term corporate bonds
C) subtracting a real return component from the rate on long-term Treasury securities
D) adding a real return component to interest rates on short-term corporate securities

Question

Quizplus · Accepted Answer

Long-run inflation expectations are best estimated by subtracting a real return component from the rate on long-term Treasury securities. This is because Treasury securities are considered to be risk-free and their yields are a good indicator of the market's expectations for inflation over the long-term. By subtracting the real return component (which reflects investors' expectations for future growth), we can isolate the inflation expectations component of the yield.

Long-Run Inflation Expectations in the Capital Markets Can Be Estimated