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Use the interest rate model to solve the following problem. One-year treasury securities are yielding 12% and two-year treasuries yield 13%. The maturity risk premium
Use the interest rate model to solve the following problem. One-year treasury securities are yielding 12% and two-year treasuries yield 13%. The maturity risk premium is zero for one-year debt and 1% for two-year debt. The real risk-free rate is 3.2%. What are the expected rates of inflation for the next two years? (Hint: Set up a separate model for each term with the yearly inflation rates as unknowns.) Round your answer to one decimal place.
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