Because of a recession, the inflation rate expected for the coming year isonly 3%. However, the inflation rate in Year 2 and thereafter is expectedto be constant at some level above 3%. Assume that the real risk-free rateis r* 5 2% for all maturities and that there are no maturity risk premiums.If 3-year Treasury notes yield 2 percentage points more than 1-year notes,what inflation rate is expected after Year 1?

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Interest Rate

When you deposit your money with the bank, the deposit earns you some extra money at the end of the specific period – something more than what you deposited. That amount of money that the bank pays you for keeping the money with the bank is the “interest” and the percentage at which the bank pays you for your amount is called the “interest rate”.