A comparison of the model implications in rows 1 and 7 shows that 10-year nominal bonds have a risk premium over three-month nominal bills of 2.06% per year, while 10-year indexed bonds have a risk premium over three-month indexed bills of 1.62% per year. These numbers, together with the 49-basis-point risk premium on three-month nominal bills over three-month indexed bills, imply a 10-year inflation risk premium (the risk premium on 10-year nominal bonds over 10-year indexed bonds) of slightly less than 1%. This estimate is consistent with the rough calculations in Campbell and Shiller (1996).

Rows 2 and 8 show that nominal bonds are much more volatile than indexed bonds; the difference in volatility increases with maturity, so that 10-year nominal bonds have a standard deviation three times greater than 10-year indexed bonds. This difference in volatility makes the Sharpe ratio for indexed bonds in row 9 considerably higher than the Sharpe ratio for nominal bonds in row 3.