Question: Assume that the real risk free rate is 4 percent and
Assume that the real risk-free rate is 4 percent and the maturity risk premium is zero. If the nominal rate of interest on one-year bonds is 11 percent and on comparable-risk two-year bonds it is 13 percent, what is the one-year interest rate that is expected for Year 2? What inflation rate is expected during Year 2? Why might the average interest rate during the two-year period differ from the one-year interest rate expected for Year 2?
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