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1. EXPECTATIONS THEORY

One-year Treasury securities yield 2.75%. The market anticipates that 1 year from now, 1-year Treasury securities will yield 5.25%. If the pure expectations theory is correct, what is the yield today for 2-year Treasury securities? Calculate the yield using a geometric average. Do not round your intermediate calculations. Round your answer to two decimal places.

2. EXPECTATIONS THEORY AND INFLATION

Suppose 2-year Treasury bonds yield 5.3%, while 1-year bonds yield 5.6%. r* is 1.75%, and the maturity risk premium is zero. Use minus sign for any negative expected inflation rate.

Using the expectations theory, what is the yield on a 1-year bond 1 year from now? Calculate the yield using a geometric average. Do not round intermediate calculations. Round your answer to two decimal places.

What is the expected inflation rate in Year 1? Do not round intermediate calculations. Round your answer to two decimal places.

What is the expected inflation rate in Year 2? Do not round intermediate calculations. Round your answer to two decimal places.

I'm extremely confused on how to solve these problems. If anyone has any sources to explain the expectation theory as well as can help walk me through the problems it would be much appreciated.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92693320

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