### Expected Rate of Interest: Using the expectations theory, forecast the interest rate on a 1-year bond during the second year. What is the expected inflation rate?

Suppose the annual yield on a 2-year Treasury bond is 7.5 percent, the yield on a 1-year bond is 5 percent, k* is 3 percent, and the maturity risk premium is zero. A) Using the expectations theory, forecast the interest rate on a 1-year bond during the second year (Under the expectations theory, the yield on a 2-year bond is