Suppose the annual yield on a 2-year Treasury bond is 6 percent, the yield on a 1-year bond is 5 percent, the real risk-free rate is 3 percent, and the maturity risk premium is 0.

a) Using the expectations theory, forecast the interest rate on a 1-year bond during the second year. (Hint: Under the expectations theory, the yield on a 2-year bond is equal to the average yield on 1-year bonds in Year 1and Year 2)

b) What is the expected inflation rate in Year 1? Year 2?