Assume that the interest rate on a one-year Treasury bill is 6

percent. and the rate on a two-year Treasury note is 7 percent.

a. If the expected real rate of interest is 3 percent, determine the

infl ation premium on the Treasury bill.

b. If the maturity risk premium (MRP) is expected to be zero,

determine the infl ation premium on the Treasury note.

c. What is the expected infl ation premium for the second year?