Question
Assume that the real risk-free rate is 1% and that the maturity risk premium is zero....
Assume that the real risk-free rate is 1% and that the maturity risk premium is zero. If a 1-year Treasury bond yield is 5% and a 2-year Treasury bond yields 6%, what is the 1-year interest rate that is expected for Year 2? Calculate this yield using a geometric average. 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.
%
Homework Answers
Answer #1
Real risk-free rate (rf) = 1.00%
01 Year T-Bond Yield r1 = 5.00% = 0.05
02 Year T-Bond Yield r2 = 7.00% = 0.06
the 1-year interest rate that is expected for Year 2 1r2
1r2 = 7.01%
Ans : the 1-year interest rate that is expected for Year 2 1r2 = 7.01%
inflation rate is expected during Year 2 = 02 Year T-Bond Yield r2 - Real risk-free rate (rf)
=7% - 1% = 6.00%
Ans : inflation rate is expected during Year 2 = 6.00%
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