Question 2:

Yields of U.S. Treasury Notes

Maturity	1	2	3	4	5
Zero-coupon YTM	4.25%	3.45%	3.25%	3.00%	2.50%

A. Suppose that the CEO of your firm is pushing to dramatically increase the scale (size) of a planned project in your division. The output of the planned project is relatively expensive, is planned to be sold to consumers and businesses, and is expected to generate big payoffs in the near term. You decide to have a look at the U.S. Treasury zero-coupon yield curve (given immediately above). Given your knowledge, does the yield curve contain information that either justifies or calls into question your CEO's decision? If so, should you tell your CEO? Explain in detail the various economic/financial theories and concepts supporting the position you will take. The answer should include text explanations, graphs, and equations where appropriate. Be sure to label everything accurately.

B. Based on the yield curve above, what do you expect the two-year interest rate to be one year from now?