What is inflation?

What is the average inflation rate?

• The real risk-free rate of interest, r* is 3%, and it is expected to remain constant over time. Inflation is expected to be 2% per year for the next 3 years and 4% per year for the next 5 years. The maturity risk premium is equal to 0.1 (t-1)%, where t=the bond's maturity. The default risk premium for a BBB-rated bond is 1.3% 1. what is the average expected inflation rate over the next 4 years? 2. what is the yield on a 4-year Treasury bond? 3. what is the yield on a 4-year BBB-rated corporate bond with a liquidity premium of 0.5%? 4. What is the yield on an 8-year treasury bond? 5. What is the yield on an 8-year BBB-rated corporate bond with a liquidity premium of 0.5%? 6. If the yield on a 9-year Treasury bond is 7.3%, what does that imply about expected inflation in 9 years?

• Answer:

  Okay well in 2002 10 years ago in england 100 pounds today will now be 133.47 inflation each year was , 3.2 percent a year according to the bank of england. also a nine year goverment bonds yeild according to bloomberg is 2.04 percent you dont get alot in goverment bonds for obvious reasons. soo in theory in order to truely make money you must beat inflation even if its only a percent.