Problem:

Suppose that several years from now, the yield to maturity on a 2 year Treasury note was 4.8% while the yeiald on a 1 year note was 5.2%. Assume that neither Treasury Note had coupon payments, so the only payment was the face value received when the note matured.

Required:

Question 1: Why is it unsual for yields on longer term notes to be lower than yeilds on shorter term notes?

Question 2: What expectation would lead a rish neutral investor to buy the 2 note (instead of the 1 year) given its lower yield? (please involve a specific number).

Note: Please show how you came up with the solution.