Currently, Yields to Maturity on 1-year and 2-year US Treasury securties are .602% and .852%. You can assume that for simplification purposes there are no coupon payments on these bonds and the ytm 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 the market expectations of the yield on 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.