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Calculating the Expected Interest Rate

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If the real risk-free rate is 3%, inflation is expected to be 2% this year and 4% during the next 2 years. Assuming the maturity risk premium is zero, what is the yield on 2-year Treasury Securities? what is the yield on 3-year Treasury Securities?

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Solution Summary

This solution provides a brief explanation and calculations for average expected inflation and yield for the two-year and the tree-year security.

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The market rate of interest is equal to the real rate of interest plus the inflation rate plus the product of the real rate of ...

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