Question: 1-year T-bills yield 6% and 2-year Treasury notes yield 8.5%. The real risk-free rate of interest is 4% and expected to stay constant, while the

1-year T-bills yield 6% and 2-year Treasury notes yield 8.5%. The real risk-free rate of interest is 4% and expected to stay constant, while the maturity risk premium is zero.

Using the expectations theory, what is the yield on a 1-year risk-free bond, one year from now?

and What is the expected inflation rate in Year 1?

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