Financial Management
Currently, yields to maturity on 1 year and 2 year us treasury securites are .602% and .852%. You can assume that for simplification purposes there are no coupon payments on these bonds and the yield to maturity is entirely due to the difference in face value and current market price of these securities.
a) If financial market investors were risk neutral, what would this data imply about market expectations of the yield on the 1 year bonds 1 year from now? Show your Calculations.
b) Given that financial market investors are risk averse, do you think actual market expectations differ slightly from your answer to (a). If so, how? Explain your answer.
