Suppose the annual yield on a two-year Treasury bond is 7.5 percent, the yield on a one-year

Question:

Suppose the annual yield on a two-year Treasury bond is 7.5 percent, the yield on a one-year bond is 5 percent, r* is 3 percent, and the maturity risk premium is zero (0).

a. Using the expectations theory, forecast the interest rate on a one-year bond during the second year.

b. What is the expected inflation rate in Year 1? Year 2?

Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...