EXPECTATIONS THEORY AND INFLATION
Suppose 2-year Treasury bonds yield 4.2%, while 1-year bonds yield 1.5%. r* is 1.25%, 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. Do not round intermediate calculations. Round your answer to two decimal places. %
What is the expected inflation rate in Year 1? Do not round intermediate calculations. Round your answer to two decimal places. %
What is the expected inflation rate in Year 2? Do not round intermediate calculations. Round your answer to two decimal places. %