(solution) Inflation is expected to be 5% next year and a steady 8% each

(solution) Inflation is expected to be 5% next year and a steady 8% each

Inflation is expected to be 5% next year and a steady 8% each year thereafter. Maturity risk premiums are zero for one-year debt but have an increasing value for longer debt. One-year government debt yields 9%, whereas two-year debt yields 11.5%.

  1. What is the real risk-free rate for two-year debt? Round your answer to one decimal place.%
    What is the maturity risk premium for two-year debt? Round your answer to one decimal place.%
  2. Forecast the nominal yield on one-year government debt issued at the beginning of the second year. Round your answer to one decimal place.%
    Forecast the nominal yield on two-year government debt issued at the beginning of the second year. Round your answer to one decimal place.%