Assume that the real risk-free rate is 1% and that the maturity risk premium is zero. if a 1-year treasury bond yield is 7% and a 2-year treasury bond yields 8%, what is the 1-year interest rate that is expected for year 2? calculate this yield using a geometric average. do not round intermediate calculations. round your answer to two decimal places.

the 1-year interest rate that is expected for year 2 is 7.5%

Explanation:

using geometric average to calculate the yield as follows

the formula for geometric average is given as: gm=( r1 + r2)∧1/nth, where

gm represent geometric average, r1 represent year 1 rate of interest or yield=7%, r2 represent year 2 interest rate or yield = 8%, n represent number of years, and ∧ represent raise to power

gm = (1.07 + 0.08)∧1/2 = 1.075= 7.5%

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