Problem 5-13

Inflation is expected to be 5% next year and a steady 7% each year thereafter. Maturity risk premiums are zero for one-year debt but have an increasing value for longer debt. One-year government debt yields 9%, whereas two-year debt yields 11.9%.

What is the real risk-free rate for two-year debt? Round your answer to one decimal place. % What is the maturity risk premium for two-year debt? Round your answer to one decimal place. %

Forecast the nominal yield on one-year government debt issued at the beginning of the second year. Round your answer to one decimal place. % Forecast the nominal yield on two-year government debt issued at the beginning of the second year. Round your answer to one decimal place. %