If the yield to maturity for a par value TIPS bond with 8 years to maturity is 3%, and the yield to maturity of a U.S Treasury note with 8 years is 4.25%, this implies that
A)The expected annual rate of inflation over the next 8 years is-1.25%.
B)The expected annual rate of inflation over the next 8 years is 1.25%.
C)The expected annual rate of inflation over the next 8 years is -2.25%
D)The expected annual rate of inflation over the next 8 years is 2.25%
E)None of the above.

Question

Quizplus · Accepted Answer

The expected annual rate of inflation is the difference between the yield of the nominal Treasury note and the TIPS bond, which is 4.25% - 3% = 1.25%.

If the Yield to Maturity for a Par Value TIPS