Question: Suppose the annual yield on a two year Treasury bond is

Suppose the annual yield on a two-year Treasury bond is 7.5 percent, the yield on a one-year bond is 5 percent, r* is 3 percent, and the maturity risk premium is zero (0).
a. Using the expectations theory, forecast the interest rate on a one-year bond during the second year.
b. What is the expected inflation rate in Year 1? Year 2?


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  • CreatedNovember 24, 2014
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