For example, if you know that the real rate of interest is $5\%$ and it is expected to remain constant for the next $3$ years, inflation is expected to be $1\mathrm{.}80\%$ next year, $4\mathrm{.}00\%$ the following year, and $5\mathrm{.}30\%$ the third year, then the average expected inflation rate over the next three years is $1\mathrm{.}80\%+4\mathrm{.}00\%+5\mathrm{.}30\%3=3\mathrm{.}70\%$

$.$ If also you can estimate that the maturity risk premium is $0\mathrm{.}1\backslash$times $($t$1)\%$

$,$ where t

is number of years to maturity, then the yield on a $1-$year Treasury bill, which has neither default risk premium nor liquidity risk premium, is as follows:

rT$1$

$=$

r$*+$IP$1+$MRP$1$

$=$

$5\%+1\mathrm{.}80\%+0\mathrm{.}1\backslash$times $(11)\%$

$=$

$6\mathrm{.}80\%$

Complete the following table by calculating yields on a $2-$ and $3$year Treasury bills, respectively.

Yield

$2-$year Treasury bill

$3-$year Treasury bill