Question: eBook Suppose 2-year Treasury bonds yield 4.5%, while 1-year bonds yield 3.6%. r* is 2%, and the maturity risk premium is zero. Using the expectations

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Suppose 2-year Treasury bonds yield 4.5%, while 1-year bonds yield 3.6%. r* is 2%, and the maturity risk premium is zero.

  1. 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.

    %

  2. What is the expected inflation rate in Year 1? Year 2? Do not round intermediate calculations. Round your answers to two decimal places.

    Expected inflation rate in Year 1: %

    Expected inflation rate in Year 2: %

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