Suppose 2-year Treasury bonds yield 5.3%, while 1-year bonds yield 3.6%. r* is 1%, and the...

Suppose 2-year Treasury bonds yield 5.3%, while 1-year bonds yield 3.6%. r* is 1%, and the maturity risk premium is zero. Negative expected inflation rates, if any, should be indicated by a minus sign.

Using the expectations theory, what is the yield on a 1-year bond, 1 year from now? Calculate the yield using a geometric average. Do not round intermediate calculations. Round your answer to two decimal places.

b. What is the expected inflation rate in Year 1? Do not round intermediate calculations. Round your answer to two decimal places

What is the expected inflation rate in Year 2? Do not round intermediate calculations. Round your answer to two decimal places.

Expert Solution

jeff jeffy answered 2 years ago

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