Which statement about the break-even inflation rate is true?

A. The 3-month break-even inflation rate is very close to the 3-month expected inflation rate.
B. Break-even inflation rates are simply the markets' best guess of future inflation over the relevant investment horizon.
C. The 10-year break-even inflation rate is the sum of θ_t,10 and π_t,10, where θ_t,10 is the expected 10-year inflation and π_t,10 is the risk premium for the uncertainty of the expected 10-year inflation.

Correct Answer: A

A is true. The inflation premium is negligible for short-term default-free securities.

B is false. Break-even inflation rates are not simply the markets' best estimate of future inflation over the relevant investment horizon. They also include a risk premium to compensate investors for their uncertainty about future inflation.

C is false. The 10-year break-even inflation rate incorporates both θ_t,10 and π_t,10 but is not simply the sum of the two.