Suppose that it is January 2. During the next three years economists project that inflation will be 3 percent 4 percent and 8 percent respectively; every
year thereafter inflation is expected to settle at 2 percent. It is estimated that a maturity exists on Treasury securities that equal 0.1 percent for each
year that remains until the maturity of a bond. To yield a real risk-free rate r* equal to 3 percent (a) what would the average nominal interest rate on a
five-year Treasury bond have to be? (b) what would the average nominal rate have to be for a 10-year Treasury bond with the same characteristics?