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Shortening the term of the debt

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One year bonds are paying a rate of return of 2%, while two year bonds are paying a rate of 4%. The US government issues 2-year bonds to borrow. The US treasury secretary decides to save money by shortening the term of the debt, issuing two one year bonds in succession rather than a two-year bond. Interest payment each year will be lower by (.04-.02)*D where D is the level of debt. If pure expectations theory is correct will the secretaries plan work?

Reference no: EM132283766

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