The question is:
The real risk free rate is 3%. Inflation is expected to be 4% this coming year, jump to 5% next year, and increase to 6% the year after. According to the expectations theory, what should be the interest rate on a 3-year, risk free securities today?
I added up the inflation rates and divided by 3: (.04+.05+.06)/3=5%. The answer should be 8%, I am really confused on how to get that. Any help is appreciated!
The real risk free rate is 3%. Inflation is expected to be 4% this coming year, jump to 5% next year, and increase to 6% the year after. According to the expectations theory, what should be the interest rate on a 3-year, risk free securities today?
I added up the inflation rates and divided by 3: (.04+.05+.06)/3=5%. The answer should be 8%, I am really confused on how to get that. Any help is appreciated!
