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Suppose 2-year Treasury bonds yield 5%, while 1-year bonds yield 2.7%. r* is 1.5%, and the maturity risk premium is zero.

a. Using the expectations theory, what is the yield on a 1-year bond, one year from now? Round your answer to two decimal places.

b. What is the expected inflation rate in Year 1? Round your answer to two decimal places.

c. What is the expected inflation rate in Year 2? Round your answer to two decimal places.

Basic Finance, Finance

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