6) Current annualized yields on 1 year US treasury securities are only .28%....w

Question

6) Current annualized yields on 1 year US treasury securities are only .28%....while current annualized yields on 2year US treasury securities are .69% (note you may assume that both 1 and 2year securities in this example are “0” coupon securities with no payment other than the maturity value on the maturity date. What does this data suggest about financial market expectations of 1 year yields, 1 year from now? Explain…. (Assume investors are risk neutral in these short time horizons with default free treasuries.)

Explanation / Answer

Ans:

while compare the interest rates usually longer life deposits will carry higher interest rates because of its compounding process. and in this example also the same thing applicable. the longer the maturity period the higher the interest rates. and long term investments always carries some aditional risks, because it is very difficult to estimate what happens after 2 years than 1 year. so, this is a common factor in investments.

when it comes to inflation, it is not considered for short terms. it should always considers for long term only. because we may not chage or control many factors at short term but in long term every strategy, policy will be flexible and if we wish we can modify it.

now the lower inflation rate is may be because of lesser fuel prices and lesser cruide oil prices. but the same scenario expects for a long time in international markets. once the cruide oil prices reaches its highest levels, it is very difficult to control the inflation rate. and the alternatives are very few for the commodity, so the concern about inflation is accepatable.

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