Assume that the real risk-free rate is 2% and that the maturityrisk premium is zero. If a 1-year Treasury bond yield is 6.6% and a2-year Treasury bond yields 6.8%. Calculate the yield using ageometric average.

What is the 1-year interest rate that is expected for Year 2? Donot round intermediate calculations. Round your answer to twodecimal places.

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What inflation rate is expected during Year 2? Do not roundintermediate calculations. Round your answer to two decimalplaces.

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Comment on why the average interest rate during the 2-yearperiod differs from the 1-year interest rate expected for Year2.

1. The difference is due to the real risk-free rate reflected inthe two interest rates. The real risk-free rate reflected in theinterest rate on any security is the average real risk-free rateexpected over the security's life.
2. The difference is due to the fact that the maturity riskpremium is zero.
3. The difference is due to the fact that we are dealing with veryshort-term bonds. For longer term bonds, you would not expect aninterest rate differential.
4. The difference is due to the fact that there is no liquidityrisk premium.
5. The difference is due to the inflation rate reflected in thetwo interest rates. The inflation rate reflected in the interestrate on any security is the average rate of inflation expected overthe security's life.