Question: Suppose 2-year Treasury bonds yield 5%, while 1-year bonds yield 5%. r* is 1.25%, and the maturity risk premium is zero. Use minus sign for

Suppose 2-year Treasury bonds yield 5%, while 1-year bonds yield 5%. r* is 1.25%, and the maturity risk premium is zero. Use minus sign for any negative expected inflation rate.

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? Do not round intermediate calculations. Round your answer to two decimal places. _____%

c. What is the expected inflation rate in Year 2? Do not round intermediate calculations. Round your answer to two decimal places. _____ %

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