Using expectations theory-what is expected inflation rate

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Reference no: EM131020061

Suppose 2-year Treasury bonds yield 5.9%, while 1-year bonds yield 6.8%. r* is 1.75%, 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. Round your answer to two decimal places.

5.01%

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

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

Reference no: EM131020061

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