The following table shows the nominal interest rate for U.S. Treasury bonds with different maturities in...

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The following table shows the nominal interest rate for U.S. Treasury bonds with different maturities in September between 2020 and 2022: Time 30/09/20 30/09/21 30/09/22 6 months 0.11 0.05 3.92 1 year 0.12 0.09 4.05 2 years 3 years 5 years 7 years 0.13 0.16 0.28 0.28 0.53 0.98 4.22 4.25 4.06 10 years 20 years 30 years 0.47 0.69 1.23 1.46 1.32 1.52 2.02 2.08 3.97 3.83 4.08 3.79 Source: U.S. Treasury Use the liquidity premium theory to answer the following questions: (a) (9 marks) According to the table, what is the market predicting about the movement of future short- term interest rates in each of the three periods? Explain your answer using the shape of the yield curve. (b) (3 marks) In September 2021, the spread between the six-month and 10-year Treasury bonds is the highest out of three years. Why is that the case? The following table shows the nominal interest rate for U.S. Treasury bonds with different maturities in September between 2020 and 2022: Time 30/09/20 30/09/21 30/09/22 6 months 0.11 0.05 3.92 1 year 0.12 0.09 4.05 2 years 3 years 5 years 7 years 0.13 0.16 0.28 0.28 0.53 0.98 4.22 4.25 4.06 10 years 20 years 30 years 0.47 0.69 1.23 1.46 1.32 1.52 2.02 2.08 3.97 3.83 4.08 3.79 Source: U.S. Treasury Use the liquidity premium theory to answer the following questions: (a) (9 marks) According to the table, what is the market predicting about the movement of future short- term interest rates in each of the three periods? Explain your answer using the shape of the yield curve. (b) (3 marks) In September 2021, the spread between the six-month and 10-year Treasury bonds is the highest out of three years. Why is that the case?

Answer rating: 100% (QA)

a The market is predicting that future shortterm interest rates w... View the full answer