As one of several advisors to the U.S. Secretary of the Treasury, you have been asked to submit a memo in connection with the average maturity of the obligations of the federal government. The basic premise is that the average maturity is far too short. As a result, issues of debt are coming due with great frequency and needing constant reissue. On the other hand, the economy is presently showing signs of weakness. It is considered unwise to issue long-term obligations and absorb investment funds that might otherwise be invested in employment-producing construction and other private sector support. Based on these conditions, what do you recommend as a course of action to the U.S. Secretary of the Treasury?
Answer to relevant QuestionsAssume a condition in which the economy is strong, with relatively high employment. For one reason or another, the money supply is increasing at a high rate and there is little evidence of money creation slowing down. ...You are considering an investment in a one-year government debt security with a yield of 5 percent or a highly liquid corporate debt security with a yield of 6.5 percent. The expected inflation rate for the next year is ...A corporate bond has a nominal interest rate of 12 percent. This bond is not very liquid and consequently requires a 2 percent liquidity premium. The bond is of low quality and thus has a default risk premium of 2.5 percent. ...How can the Rule of 72 be used to determine how long it will take for an investment to double in value? Find the future value (FV) one year from now of a $7,000 investment at a 3 percent annual compound interest rate. Also calculate the future value if the investment is made for two years.
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