3. On January 15, 2009, the interest rate (yield to maturity) on a 5-year inflation-indexed Treasury was 1.46 percent and the yield to maturity on a nominal 5-year Treasury was 1.36 percent.
According to this information, what was the average rate of inflation that financial market participants believed, on that day (January 15, 2009), would occur over the next 5 years (the next five years being 2009 through 2014)?
Suppose, at the time, that you thought that the average rate of inflation was going to average 2 percent between 2009 and 2014. Would you purchase the nominal or the inflation-indexed bond?
