Question: Suppose 2-year Treasury bonds yield 3.5%, while 1-year bonds yield 2.6%. r* is 1%, and the maturity risk premium is zero. a. Using the expectations

Suppose 2-year Treasury bonds yield 3.5%, while 1-year bonds yield 2.6%. 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 17 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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