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%
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. %