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 expectations theory holds and the real risk-free rate is r* = 2.25%. If the yield on 3-year Treasury bonds equals

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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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 expectations theory holds
and the real risk-free rate is r* = 2.25%. If
the yield on 3-year Treasury bonds equals
the 1-year yield plus 2.25%, what inflation
rate is expected after Year 1? Round your
answer to two decimal places.
Transcribed Image Text: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 expectations theory holds and the real risk-free rate is r* = 2.25%. If the yield on 3-year Treasury bonds equals the 1-year yield plus 2.25%, what inflation rate is expected after Year 1? Round your answer to two decimal places.
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