Problem:
Assume that the real risk-free rate is 2% and that the maturity risk premium is zero. If a 1 year Treasury bond yield is 5% and a 2 year Treasury bond yields 7%, what is the 1-year interest rate that is expected for the year 2? Comment on why the average interest rate during the 2-year period differs from the 1-year interest rate expected for year 2. Explain comprehensively and justify your answer.