PM 34.1 - Valuation and Interest Rates

The discount rate includes

1. Real Rf rate

2. Expected inflation

3. Risk premiums

Inter-temporal rate of substitution, Mt =

• How are the variables related?

In anticipated good states, utility of consumption is XXX and during anticipated bad states, utility of consumptions is XXX

lower

higher, but still lower than it is today

real risk-free rate, R =

For a risk-free, inflation-indexed zero-coupon bond w/ long-dated maturity, Po =

Nominal short-term rate, r =

Nominal long-term rate, r =

term spread =

Break-Even Inflation Rate (BEI) =