Question: Suppose 2-year Treasury bonds yield 4%, while 1-year bonds yield 3%. r* is 1.5%, and the maturity risk premium is zero. Using the expectations theory,

Suppose 2-year Treasury bonds yield 4%, while 1-year bonds yield 3%.

Suppose 2-year Treasury bonds yield 4%, while 1-year bonds yield 3%. r* is 1.5%, and the maturity risk premium is zero. Using the expectations theory, what is the yield on a 1-year bond, one year from now? Calculate the yield using a geometric average. % What is the expected inflation rate in Year 1? % What is the expected inflation rate in Year 2? %

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