Assume that the real risk-free rate is 4 percent and that the maturity risk premium is zero. Ifthe nominal rate of interèst on 1-year bonds is 10 percent and that on comparable- ask 2-year bonds is 14 percent, what is the 1-year interest rate that is expected for Year 27 What infiation rate is expected during Year 2: Comment on why the average interest rate during the 2-year period differs from the l-year interest rate expected for Year 2.
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