The real interest rate is currently 3%, and is expected to remain at that level for the next three years. In contrast, the inflation premium is expected to decrease from an annual rate of 8% during the next year, to an annual rate of 5% during the second

The real interest rate is currently 3%, and is expected to remain at that level for the next three years. In contrast, the inflation premium is expected to decrease from an annual rate of 8% during the next year, to an annual rate of 5% during the second year, and finally to a 3% rate during the third year. Using only the pure expectations theory, what are the EXACT (3 decimal places; e.g. 5.382%) annual interest rates on two-year and three-year securities?

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