Using expectations theory-what is expected inflation rate

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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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