Please show work Questions 37 Treasury Inflation Protected Securities (TIPS) and
ID: 2818877 • Letter: P
Question
Please show work
Questions 37 Treasury Inflation Protected Securities (TIPS) and US Treasury notes which pay nominal coupon and maturity payments. through 40 refer to the following exhibit, which shows annualized yields to maturity on US 2.5% 1 2.0% 1.5% 1.0% 0.5%| 0.0% US TIPS US Treasury 1.92% 0.82% 0.15% 0.28% 0.38% 0.59% -0.35% -0.5% 1.5% -1.98%-1.74%-1.55%-1.32% - 2.30% -2.0%, 2.5% 5 6 7 89 10 37. Under the Fisher effect, what is the expected annual inflation rate over the next ten years? 1.57% 1.92% 2.28%Explanation / Answer
The Fisher equation provides the link between nominal and real interest rates. To convert from nominal interest rates to real interest rates, we use the following formula:
real interest rate nominal interest rate inflation rate.
Reverse calculating for inflation = nominal interest rate - real interest rate
= 1.92 - (-0.35)
= 2.28%