Suppose 2-year Treasury bonds yield 4.9%, while 1-year bonds yield 2.8%. r* is 1.75%, and the maturity risk premium is zero. Use minus sign for any negative expected inflation rate.
Using the expectations theory, what is the yield on a 1-year
bond 1 year from now? Calculate the yield using a geometric
average.
=1.049^2/1.028-1=7.043%
b. What is the expected inflation rate in Year 1?
=2.8%-1.75%=1.05%
c. What is the expected inflation rate in Year 2?
=(4.9%-1.75%)*2-1.05%=5.250%
Suppose 2-year Treasury bonds yield 4.9%, while 1-year bonds yield 2.8%. r* is 1.75%, and the...
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