r 1 = 6.4% r 2 = 7.0% r 3 = 7.7% r 4 = 8.5% Assuming a constant real interest ra

Question

           r1 = 6.4%    r2 = 7.0%     r3 = 7.7%     r4 = 8.5%

Assuming a constant real interest rate of 2 percent, what are the approximate expected inflation rates for the next four years? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

the first two are 4.40% and 5.60% . I just need the last two years for 3rd and 4th year.

Consider the following spot interest rates for maturities of one, two, three, and four years.

           r1 = 6.4%    r2 = 7.0%     r3 = 7.7%     r4 = 8.5%

Assuming a constant real interest rate of 2 percent, what are the approximate expected inflation rates for the next four years? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

the first two are 4.40% and 5.60% . I just need the last two years for 3rd and 4th year.

Explanation / Answer

Calculation of Rate of Inflation for 3rd Year:

Total Nominal Interest on 3 Year Maturity security = 7.7 x 3 = 23.1%

Interest according to 2 Year security = 7 x 3 = 21%

So, interest is increased by 23.1 - 21 = 2.10%

But real Interest is constant it means increase in Nominal Interest is compensate by increase in Inflation.

Inflation rate in the Third Year = 5.60 + 2.10 = 7.70%

Calculation of Rate of Inflation for 4th Year:

Total Nominal Interest on 4 Year Maturity security = 8.50 x 4 = 34%

Interest according to 3 Year security = 7.70 x 4 = 30.80%

So, interest is increased by 34 - 30.80 = 3.20%

But real Interest is constant it means increase in Nominal Interest is compensate by increase in Inflation.

Inflation rate in the 4th Year = 7.70% + 3.20% = 10.90%

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