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 7% and a 2 -year Treasury bond yields 9%, 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. Comment on why the average interest rate during the 2-year period differs from the 1-year interest rate expected for Year 2. 1. The difference is due to the fact that the maturity risk premium is zero. II. The difference is due to the fact that we are dealing with very short-term bonds. For longer term bonds, you would not expect an interest rate differential. III. The difference is due to the fact that there is no liquidity risk premium. IV. The difference is due to the inflation rate reflected in the two interest rates. The inflation rate reflected in the interest rate on any security is the average V. The difference is due to the real risk-free rate reflected in the two interest rates. The real risk-free rate reflected in the interest rate on any security is the average real risk-free rate expected over the security's life. An analyst is evaluating securities in a developing nation where the inflation rate is very high. As a result, the analyst has been warned not to ignore the cross product between the real rate and inflation. A 6-year security with no maturity, default, or liquidity risk has a yield of 21.98%. If the real risk-free rate is 7%, what average rate of inflation is expected in this country over the next 6 years? (Hint: Refer to "The Links Between Expected Inflation and Interest Rates: A Closer Look".) Do not round intermediate calculations. Round your answer to the nearest whole number. A 5-year Treasury bond has a 4.6% yield. A 10-year Treasury bond yields 6.2%, and a 10 -year corporate bond yields 8.6%. The market expects that inflation will average 2.0% over the next 10 years (IP IP10=2.0%). Assume that there is no maturity risk premium (MRP =0 ) and that the annual real risk-free rate, r, will remain constant over the next 10 years. (Hint: Remember that the default risk premium and the liquidity premium are zero for Treasury securities: DRP = LP = 0 .) A 5-year corporate bond has the same default risk premium and liquidity premium as the 10 -year corporate bond described. What is the yield on this 5 -year corporate bond? Round your answer to one decimal place