Expectations theory and inflation

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Expectations Theory and Inflation

Suppose 2-year Treasury bonds yield 5.1%, while 1-year bonds yield 3.2%. r* is 1%, 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.

%

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: EM131013339

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