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Treasury Note Implied Expected Inflation Rate

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Assume that a 3-year Treasury note has no maturity premium, and that the real, risk-free rate of interest is 3 percent. If the T-note carries a yield to maturity of 13 percent, and if the expected average inflation rate over the next 2 years is 11 percent, what is the implied expected inflation rate during Year 3?

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Solution Summary

Brief calculations show how to find the implied expected inflation rate during tear 3 of a treasury note with no maturity premium.

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Yield on T-note = 13%
Real risk free interest rate = 3%
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