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Suppose the yield to maturity on a 2 year Treasury note was 4 % while the yield on a 1 year note was 5%. Assume that neither Treasury note had coupon payments, so the only payment was 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) Why would any investor buy the 2 year note (instead of the 1 year) given its lower yield? (for full credit your answer must involve a specific number)

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M938831

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