If the yield to maturity for a par value TIPS bond with eight years to maturity is 3 percent, and the yield to maturity of a U.S Treasury note with 8 years is 4.25 percent, this implies that
A) the expected annual rate of inflation over the next eight years is -1.25 percent.
B) the expected annual rate of inflation over the next eight years is 1.25 percent.
C) the expected annual rate of inflation over the next eight years is -2.25 percent.
D) the expected annual rate of inflation over the next eight years is 2.25 percent.
E) the expected annual rate of inflation over the next eight years is 0 percent.

Question

Quizplus · Accepted Answer

The expected annual rate of inflation can be estimated by the difference in yield between the TIPS bond and the U.S. Treasury note. Since the TIPS yield is 3% and the Treasury note's yield is 4.25%, the expected inflation rate is 4.25% - 3% = 1.25%.

If the Yield to Maturity for a Par Value TIPS