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EXPECTED INTEREST RATE The real risk-free rate is 2.45%. Inflation is expected to be 2.25%...

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Finance

EXPECTED INTEREST RATE

The real risk-free rate is 2.45%. Inflation is expected to be 2.25% this year, 4.3% next year, and 2.9% thereafter. The maturity risk premium is estimated to be 0.05 (t - 1)%, where t = number of years to maturity. What is the yield on a 7-year Treasury note? Do not round your intermediate calculations. Round your answer to two decimal places.

INFLATION

Due to a recession, expected inflation this year is only 2.75%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 2.75%. Assume that the expectations theory holds and the real risk-free rate (r*) is 3.5%. If the yield on 3-year Treasury bonds equals the 1-year yield plus 3.5%, what inflation rate is expected after Year 1? Round your answer to two decimal places.

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