a. The U.S. government anticipates a huge strain on the Federal budget when a lot of citizens will retire in the next 20 25 years so that U.S. Treasury has to increase its borrowing, which is currently at very high level already. Explain the possible impact on the risk and term structure (if any) of interest rates. (10 marks)

b. The vaccine for COVID-19 is expected to be available next year and the Federal Reserve is concerned about the rise of inflation rate when the economy recovers, which will increase the short-term interest rates accordingly. Explain the possible impact on the long-term interest rates and the yield curve. What does the slope of the yield curve reveal about the effectiveness of the Feds policy ? Use diagrams to illustrate the yield curves.

(10 marks)