Question

The rate of inflation expected by investors can be determined using the yield of TIPS in which way?

• A. One minus the yield on TIPS
• B. Yield on TIPS plus yield on a regular T-note of the same maturity
• C. Coupon rate on TIPS minus coupon rate on a regular T-note of the same maturity
• D. Yield on a regular T-note minus yield on a TIPS of the same maturity

Answer 1

The answer to the question is d)

Yield on a regular t note minus the yield on a tips of same maturity

For example - if a 3 year t note has an interest rate of 3 percent and a same maturity tips has an interest of 1 percent. Then inflation expectations is 2 percent

Tips are inflation adjustable on principal and thus yield is lesser.

Other options are incorrect because such approches cannot be used to calculate inflation

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