6-6: Using the Yield Curve to Estimate Future Interest Rates Problem 6-14 Expect

Question

6-6: Using the Yield Curve to Estimate Future Interest Rates

Problem 6-14
Expectations Theory and Inflation

Suppose 2-year Treasury bonds yield 4.4%, while 1-year bonds yield 2.8%. r* is 1.5%, 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.

%

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.

%

Explanation / Answer

Under expectation theory future rates are directly related to spot rates and can derived

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