r 1 = 3.9% r 2 = 4.5% r 3 = 5.2% r 4 = 6.0% Assuming a constant real interest ra

Question

           r1 = 3.9%    r2 = 4.5%     r3 = 5.2%     r4 = 6.0%

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.)

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

           r1 = 3.9%    r2 = 4.5%     r3 = 5.2%     r4 = 6.0%

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.)

Explanation / Answer

Inflation rate = [(1+r)/(1+real rate) ] - 1

I1 = [(1+.039)/(1+.02)] -1

   = [1.039/1.02] -1

= 1.0186-1

= .0186 OR 1.86%

I2 = [1.045/1.02] - 1

= 1.0245-1

= .0245 OR 2.45%

I3 = [1.052/1.02] -1

= 1.0314 - 1

= .0314 OR 3.14%

I4 = [1.06/1.02 ] -1

= 1.0392-1

   = .0392 OR 3.92%

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