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Assume that the real risk-free rate is 2% and that the maturity risk premium is zero. If the 1-year bond yield is 5% and a
Assume that the real risk-free rate is 2% and that the maturity risk premium is zero. If the 1-year bond yield is 5% and a 2-year bond (of similar risk) yields 7%, what is the 1-year interest rate that is expected for year 2? What inflation risk 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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