Suppose that the federal government increases its debt

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1. Suppose that the Federal government increases its debt. Using a bond market diagram, show the effect on interest rates. Provide the specific bond to which this behavior would pertain.

2. Provide two reasons other than in questions #6, #7, and #8 why interest rates might decrease, at least one from demand and one from supply. In each case provide the cause (with the correct change) and draw the bond market diagram. For the supply change, include the corresponding specific bond.

3. Consider the following set of interest rates for U.S. Treasury Bills and Treasury Bonds.

Term to Maturity (years) Interest Rate (%)

------------------------------- ----------------------

0.25 7.29

0.50 6.66

3.00 6.27

10.00 5.59

30.00 5.01

Provide an explanation for the shape of the above yield curve based upon the Expectations Hypothesis, Market Segmentation Hypothesis, and Preferred Habit Hypothesis. Define each hypothesis before applying it to the above situation.

Reference no: EM131172348

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