Read the following article, which introduces the concept of Treasury bills and the relationship between their yield and price. Then answerthe question that follows.HOW DO T-BILL YIELDS GO NEGATIVE? BY THE APLIA ECONOMICS CONTENT TEAMThe week of September 15, 2008, was ripe with volatility in U.S. financial markets. Events unfolding in the wake of the mortgage crisis madeinvestors extremely fearful. One result of this fear was a "flight to quality" as investors sought to avoid risk by moving their funds into thesafest asset classes. U.S. Treasury securities (or "Treasuries," as they're commonly known) are one such asset class, considered to havevirtually no risk.An article from the Associated Press (Madlen Read, "Treasures Dip on RTC Speculation, but Anxiety High," September 18, 2008) discussessome of the factors that led investors to bid up the prices of 3-month United States Treasury bills (T-bills) to such an extent that their yieldsfell to a shockingly low level. Before 2008, the last time the T-bill yield was negative was 1940, in the early stages of World War II. Accordingto the article:Heavy buying of the 3-month Treasury bill, considered one of the safest investments around, sent its yield to just above zero at times duringa fractious day across the financial markets.... When investors are fearful of taking risks, the economy suffers. Corporate credit spreads, orthe difference between the yield on a corporate bond and a government bond, have been approaching levels not seen since World War II,noted Citigroup economist Steven Wieting in a note Thursday. That means it could be very expensive for companies to borrow money, whichis essential to growing and maintaining a business if the credit markets don't thaw.... In other late Treasury trading, the benchmark 10-yearTreasury note fell 28/32 to 103 29/32. Its yield rose to 3.53 percent from 3.42 percent late Wednesday, according to BGCantor MarketData. Yields move in the opposite direction from prices.... On Wednesday [September 17, 2008], demand for the 3-month Treasury bill hadsoared so high that the yield briefly dipped into negative territory, which means a bill holder would take a small loss at maturity. To manyinvestors, a small loss is preferable to the massive declines seen this week on Wall Street.So what events, in particular, caused this rush to T-bills? The following unsettling developments on Wall Street are claimed to be responsiblefor this freeze: the bankruptcy of Lehman Brothers Holdings Inc., the absorption of Merrill Lynch & Co. by Bank of America Corp., the $85billion government bailout of the insurer American International Group Ic., and a money-market fund that had exposure to Lehman andfailed to maintain assets of at least $1 for every dollar its clients invested.Answer the following two questions.Ouortion 1: Fynlain the negative vield curve. to the article:Heavy buying of the 3-month Treasury bill, considered one of the safest investments arouna fractious day across the financial markets.... When investors are fearful of taking risks, tthe difference between the yield on a corporate bond and a government bond, have been anoted Citigroup economist Steven Wieting in a note Thursday. That means it could be veryis essential to growing and maintaining a business if the credit markets don't thaw... In otTreasury note fell 28/32 to 103 29/32. Its yield rose to 3.53 percent from 3.42 percent lateData. Yields move in the opposite direction from prices.... On Wednesday [September 17,soared so high that the yield briefly dipped into negative territory, which means a bill holdeinvestors, a small loss is preferable to the massive declines seen this week on Wall Street.So what events, in particular, caused this rush to T-bills? The following unsettling developmfor this freeze: the bankruptcy of Lehman Brothers Holdings Inc., the absorption of Merrill Ibillion government bailout of the insurer American International Group Inc., and a money-mfailed to maintain assets of at least $1 for every dollar its clients invested.Answer the following two questions.Question 1: Explain the negative yield curve.Question 2: Explain how the relationship between the bond market and the economy.

Question

Read the following article, which introduces the concept of Treasury bills and the relationship between their yield and price. Then answerthe question that follows.HOW DO T-BILL YIELDS GO NEGATIVE? BY THE APLIA ECONOMICS CONTENT TEAMThe week of September 15, 2008, was ripe with volatility in U.S. financial markets. Events unfolding in the wake of the mortgage crisis madeinvestors extremely fearful. One result of this fear was a &#34;flight to quality&#34; as investors sought to avoid risk by moving their funds into thesafest asset classes. U.S. Treasury securities (or &#34;Treasuries,&#34; as they're commonly known) are one such asset class, considered to havevirtually no risk.An article from the Associated Press (Madlen Read, &#34;Treasures Dip on RTC Speculation, but Anxiety High,&#34; September 18, 2008) discussessome of the factors that led investors to bid up the prices of 3-month United States Treasury bills (T-bills) to such an extent that their yieldsfell to a shockingly low level. Before 2008, the last time the T-bill yield was negative was 1940, in the early stages of World War II. Accordingto the article:Heavy buying of the 3-month Treasury bill, considered one of the safest investments around, sent its yield to just above zero at times duringa fractious day across the financial markets.... When investors are fearful of taking risks, the economy suffers. Corporate credit spreads, orthe difference between the yield on a corporate bond and a government bond, have been approaching levels not seen since World War II,noted Citigroup economist Steven Wieting in a note Thursday. That means it could be very expensive for companies to borrow money, whichis essential to growing and maintaining a business if the credit markets don't thaw.... In other late Treasury trading, the benchmark 10-yearTreasury note fell 28/32 to 103 29/32. Its yield rose to 3.53 percent from 3.42 percent late Wednesday, according to BGCantor MarketData. Yields move in the opposite direction from prices.... On Wednesday [September 17, 2008], demand for the 3-month Treasury bill hadsoared so high that the yield briefly dipped into negative territory, which means a bill holder would take a small loss at maturity. To manyinvestors, a small loss is preferable to the massive declines seen this week on Wall Street.So what events, in particular, caused this rush to T-bills? The following unsettling developments on Wall Street are claimed to be responsiblefor this freeze: the bankruptcy of Lehman Brothers Holdings Inc., the absorption of Merrill Lynch & Co. by Bank of America Corp., the $85billion government bailout of the insurer American International Group Ic., and a money-market fund that had exposure to Lehman andfailed to maintain assets of at least $1 for every dollar its clients invested.Answer the following two questions.Ouortion 1: Fynlain the negative vield curve. to the article:Heavy buying of the 3-month Treasury bill, considered one of the safest investments arouna fractious day across the financial markets.... When investors are fearful of taking risks, tthe difference between the yield on a corporate bond and a government bond, have been anoted Citigroup economist Steven Wieting in a note Thursday. That means it could be veryis essential to growing and maintaining a business if the credit markets don't thaw... In otTreasury note fell 28/32 to 103 29/32. Its yield rose to 3.53 percent from 3.42 percent lateData. Yields move in the opposite direction from prices.... On Wednesday [September 17,soared so high that the yield briefly dipped into negative territory, which means a bill holdeinvestors, a small loss is preferable to the massive declines seen this week on Wall Street.So what events, in particular, caused this rush to T-bills? The following unsettling developmfor this freeze: the bankruptcy of Lehman Brothers Holdings Inc., the absorption of Merrill Ibillion government bailout of the insurer American International Group Inc., and a money-mfailed to maintain assets of at least $1 for every dollar its clients invested.Answer the following two questions.Question 1: Explain the negative yield curve.Question 2: Explain how the relationship between the bond market and the economy.

Accepted Answer

Government bonds or debt securities with a maturity of less than a year are considered short-term…