Assume That a Three-Year Treasury Note (T-Note) Has No Maturity

Multiple Choice

Assume that a three-year Treasury note (T-note) has no maturity premium, and that the real risk-free rate of interest is 3 percent. If the T-note carries a nominal risk-free rate of return of 13 percent and if the expected average inflation rate over the next two years is 9 percent, what is the implied expected inflation rate during Year 3?

A) 7%
B) 12%
C) 9%
D) 11%
E) 18%