Question 1 (1 point) Suppose the interest rate on 5-year TIPS is 2% while the interest rate on standard 5-year nominal bonds is 6%. The interest rate on 10-year TIPS is 2% while the interest rate on 10-year nominal bonds is X%. Bond investors expect a 3% average inflation between 2029 and 2034. What is X? [answer with one decimal, without the % sign, for instance 1.2]

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Question 2 (at home, to practice) Suppose the interest rate on a bond offered to investors by National Savings and Investments (a UK government bank) is 4% per year + inflation and the expected inflation rate in the UK for next year is 2.7%. A. What is the exact expected nominal interest rate for this bond next year? B. Using this numerical example, explain in your own words the difference between nominal interest rates and real interest rates. C. Assume this bond matures in five years and assume that the annual inflation rate is constant for the next five years. What would be the final payment at maturity for an investment of £120? 1

ook int ences Problem 2-11 (LG 2-7) Suppose we observe the three-year Treasury security rate (13) to be 4.9 percent, the expected one-year rate next year-E(21)-to be 5.4 percent, and the expected one-year rate the following year-E(31)-to be 6.4 percent. If the unbiased expectations theory of the term structure of interest rates holds, what is the one-year Treasury security rate? (Do not round intermediate calculations. Round your percentage answer to 2 decimal places. (e.g., 32.16)) _________% One-year Treasury security rate