49. Assume that the pure interest rate is expected to be 3% for the foreseeable

Question

49. Assume that the pure interest rate is expected to be 3% for the foreseeable future, and inflation is expected to be 3%, 4% and 5% for each of the next three years and 6% thereafter. What is the base rate component for a 10-year bond?
49. Assume that the pure interest rate is expected to be 3% for the foreseeable future, and inflation is expected to be 3%, 4% and 5% for each of the next three years and 6% thereafter. What is the base rate component for a 10-year bond?
49. Assume that the pure interest rate is expected to be 3% for the foreseeable future, and inflation is expected to be 3%, 4% and 5% for each of the next three years and 6% thereafter. What is the base rate component for a 10-year bond?

Explanation / Answer

the base rate component for a 10-year bond is 8.40% (3 + [3 + 4 + 5 + 6(7)]/10 = 8.40%).

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