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Suppose 2-year Treasury bonds yield 5
Suppose 2-year Treasury bonds yield 5.9%, while 1-year bonds yield 4.8%. r* is 1.5%, and the maturity risk premium is zero. Negative expected inflation rates, if any, should be indicated by a minus sign.
- 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
Expert Solution
Treasury bond of yield= 5.9%
r= 1.5%
1- year bond yield= 4.8%
a.)
Yield on 1- year bond= ((1+ 5.9%)^ 2/ (1+ 4.8%))-1
= (1.12148/ 1.048)- 1
= 7.01%
b.)
Expected inflation rate in 1- year= 4.8- 1
= 3.8%
c.)
Expected inflation rate in 2- year= 7.01- 1
= 6.01%
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