Question: If the average expected future inflation rate is 2.1%, the real risk-free rate is 3% and a maturity risk premium of 0.09% per year to
If the average expected future inflation rate is 2.1%, the real risk-free rate is 3% and a maturity risk premium of 0.09% per year to maturity applies, what would be the return on a 5 year government security? Suppose the interest rate on a 2-year T-bond is 2% and that on a 5-year T-bond is 3.5%. Assuming the pure expectations theory is correct, what is the markets forecast for 3-year rates 3 years from now?
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