Expected Rate of Interest: Using the expectations theory, forecast the interest rate on a 1-year bond during the second year. What is the expected inflation rate?
Suppose the annual yield on a 2-year Treasury bond is 7.5 percent, the yield on a 1-year bond is 5 percent, k* is 3 percent, and the maturity risk premium is zero.
A) Using the expectations theory, forecast the interest rate on a 1-year bond during the second year (Under the expectations theory, the yield on a 2-year bond is equal to the average yield on 1-year bonds in Year 1 and Year 2)
B) What is the expected inflation rate in Year 1? Year 2?© SolutionLibrary Inc. solutionlibary.com 9836dcf9d7 https://solutionlibrary.com/business/finance/expected-rate-of-interest-using-the-expectations-theory-forecast-the-interest-rate-on-a-1-year-bond-during-the-second-year-what-is-the-expected-inflation-rate-3eho