Suppose 2-year treasury bonds yield 6 while 1-year bonds

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Suppose 2-year Treasury bonds yield 6%, while 1-year bonds yield 5%. r* is 1.5%, and the maturity risk premium is zero.

a. Using the expectations theory, what is the yield on a 1-year bond, one year from now? Round your answer to two decimal places. %

b. What is the expected inflation rate in Year 1? Round your answer to two decimal places. %

c. What is the expected inflation rate in Year 2? Round your answer to two decimal places. %

Reference no: EM13607126

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