In the next two years,the expected inflation rates are 1 percent and 2 percent,respectively,and the real interest rates are expected to be 4 percent and 4 percent,respectively.Using this information,calculate the two-year interest rate yield as of now.

Question

Quizplus · Accepted Answer

The nominal interest rate can be calculated using the formula: nominal rate = real rate + inflation rate. For the first year, it's 4% + 1% = 5%. For the second year, it's 4% + 2% = 6%. The two-year yield is the average of these two rates: (5% + 6%) / 2 = 5.5%. However, to be more precise, we calculate the geometric average: [(1.05)*(1.06)]^(1/2) - 1 = 5.56%.

In the Next Two Years,the Expected Inflation Rates Are 1