Assume that the real risk-free rate is 2 and that the, Ask an Expert

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Assume that the real risk-free rate is 2% and that the maturity risk premium is zero. If a 1 year Treasury bond yield is 5% and a 2 year Treasury bond yields 7%, what is the 1 year interest rate that is expected for Year 2? What inflation rate is expected during Year 2? Comment on why the average interest rate during the 2 year period differs from the 1 year interst rate expected for Year 2.

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