Question
The real risk-free rate is 2.75%. Inflation is expected to be 3.75% this year, 4.45% next year, and 2.3% thereafter. The maturity risk premium is
The real risk-free rate is 2.75%. Inflation is expected to be 3.75% this year, 4.45% next year, and 2.3% thereafter. The maturity risk premium is estimated to be 0.05 (t - 1)%, where t = number of years to maturity. What is the yield on a 7-year Treasury note? Do not round intermediate calculations. Round your answer to two decimal places. Due to a recession, expected inflation this year is only 2.75%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 2.75%. Assume that the expectations theory holds and the real risk-free rate (r*) is 1.5%. If the yield on 3-year Treasury bonds equals the 1-year yield plus 1.5%, what inflation rate is expected after Year 1? Round your answer to two decimal places.
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