All known information is provided You observe that the inflation rate in the Uni

Question

All known information is provided

You observe that the inflation rate in the United States is 1.6 percent per year and that T-bills currently yield 2.1 percent annually.

a. What do you estimate the inflation rate to be in Australia, if short-term Australian government securities yield 5 percent per year? Inflation rate = ___ %

b. What do you estimate the inflation rate to be in Canada, if short-term Canadian government securities yield 8 percent per year? Inflation rate = ___ %

c. What do you estimate the inflation rate to be in Taiwan, if short-term Taiwanese government securities yield 10 percent per year? Inflation rate = ___ %

Explanation / Answer

A). RUS- hUS = RFC- hFC

0.021 - 0.016 = 0.05 - hFC

hFC =0.05 - (0.021 - 0.016)

hFC = 0.05 - 0.005 = 0.045, or 4.50%

B). RUS- hUS = RFC- hFC

0.021 - 0.016 = 0.08 - hFC

hFC =0.08 - (0.021 - 0.016)

hFC = 0.08 - 0.005 = 0.075, or 7.50%

C). RUS- hUS = RFC- hFC

0.021 - 0.016 = 0.10 - hFC

hFC =0.10 - (0.021 - 0.016)

hFC = 0.10 - 0.005 = 0.095, or 9.50%

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