Expected interest rate: Calculate yield on 2-year Treasury securities and on 3-year Treasury securities.

The real risk-free rate is 3%. Inflation is expected to be 2% this year and 4% during the next 2 years. Assume that the maturity risk premium is zero. What is the yield on 2-year Treasury securities? What is the yield on 3-year Treasury securities?

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... years, MRP = 0.

First find the average inflation for the first 2 years.
IP2 = (2% + 4%) / 2 = 3%

T2 ...