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Right now, one-year bonds are paying a rate of return of 2%, while two-year bonds pay...

Right now, one-year bonds are paying a rate of return of 2%, while two-year bonds pay a rateof return of 4%. The US government issues 2-year bonds to borrow. The US treasury secretarydecides to save money by shortening the term of the debt, issuing two one-year bonds insuccession rather than a two-year bond. This year, he or she reasons, interest payment each yearwill be lower by (.04 -.02)*D, where D is the level of the debt.If pure expectations theory is correct, will the Secretary’s plan work? Explain whyor why not.Suppose, on the other hand, that preferred-habitat theoryis correct so that two-year rate include aterm premium of .005 (half a percent). Can the secretary save money? How much

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