Question: Suppose 2-year Treasury bonds yield 3.5%, while 1-year bonds yield 2.9%. r* is 1%, and the maturity risk premium is zero. Using the expectations theory,

Suppose 2-year Treasury bonds yield 3.5%, while 1-year bonds yield 2.9%. r* is 1%, and the maturity risk premium is zero.

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.
%
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: %

Attempts Average / 3 15. Problem 6.14 (Expectations Theory and Inflation) E eBook Suppose 2-year Treasury bonds yield 3.5%, while 1-year bonds yield 2.9%. r* is 1%, and the maturity risk premium is zero. a. 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. % b. 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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