EXPECTATIONS THEORY Assume that the real risk-free rate is 2% and that the maturity risk premium is
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EXPECTATIONS THEORY Assume that the real risk-free rate is 2% and that the maturity risk premium is zero. If a 1-year Treasury bond yield is 5% and a 2-year Treasury bond yields 7%, what is the 1-year interest rate that is expected forYear 2? Calculate this yield using a geometric average. What inflation rate is expected during Year 2? 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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Related Book For 
Fundamentals Of Financial Management Concise Edition
ISBN: 9781285065137
8th Edition
Authors: Eugene F. Brigham, Joel F. Houston
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