Using the yield curve to estimate future interest rates

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Using the Yield Curve to Estimate Future Interest Rates

Expectations Theory

Assume that the real risk-free rate is 2.1% and that the maturity risk premium is zero. Also assume that the 1-year Treasury bond yield is 6% and a 2-year bond yields 6.5%. Calculate the yield using a geometric average.

What is the 1-year interest rate that is expected for Year 2? Round your answer to two decimal places.

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

Comment on why the average interest rate during the 2-year period differs from the 1-year interest rate expected for Year 2.

Reference no: EM13807379

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