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The real risk-free rate is 3 percent. Inflation is expected to be 2 percent this year and 4 percent during the next 2 years. Assume that the maturity risk premium is zero. What is the yield on 2-year Treasury securities? What is the yield on 3-year Treasury securities?
rf = 3% = .03
i1 = .02; i2 = .04; i3 = .04
YTM3 = real rate + inflation3 = .03 + .04 = .07 = 7%....
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