Problemsuppose the annual yield r on a 2-year 2011-2012, Ask an Expert

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Problem:

Suppose the annual yield (r) on a 2-year (2011-2012) Treasury bond is 7.5%, while that on a 1-year bond (2011) is 5%. r* is 2% and the risk premium is zero.

Requirement:

Question 1: Forecast the interest rate (r) on a 1-year bond during the second year (2012)

Question 2: What is the expected inflation premium (IP) in Year 2011 and Year 2012? Given: r=r* + IP. Explain in detail and also provide step by step solution.

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Basic Finance, Finance

Category:- Basic Finance
Reference No.:- M91146581

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