Assume that the real risk-free rate is 1.5% and that the maturity risk premium is zero. If a 1-year Treasury bond yield is 6.4% and a 2-year Treasury bond yields 6.7%. Calculate the yield using a geometric average.
What is the 1-year interest rate that is expected for Year 2? Do not round intermediate calculations. Round your answer to two decimal places.
%
What inflation rate is expected during Year 2? Do not round intermediate calculations. Round your answer to two decimal places.
%
Comment on why the average interest rate during the 2-year period differs from the 1-year interest rate expected for Year 2.
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