Assuming the same coupon rate and maturity length,when the interest rate on a Treasury Inflation Indexed 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 yield on the nonindexed Treasury bond (8%) and the interest rate on the Treasury Inflation Indexed Security (3%) is 5%. This represents the market's expectation for inflation over the life of the bonds. Therefore, the expected rate of inflation is 5%.

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