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Suppose that several years from now the yield to maturity on 2-year treasury note was 4.85% while the yield on a 1 year note was 5.2%.Assume that neither treasury note had coupon payments, so the y payment the face value received when the note matured.

a)Why is it unusual for yields on longer term notes to be lower than yields on shorter term notes?

b)what expectations would lead a risk neutral investor to buy the 2 year note (instead of the 1 year ) given its lower yield? include your calculations.

Microeconomics, Economics

  • Category:- Microeconomics
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