Final answer:
Short-term interest rates on government securities are primarily influenced by Federal Reserve actions, expected future inflation, and the real rate of return. Interest rate risk affects longer-term investments but is not a direct factor in setting short-term rates. The correct answer is option D) I, III and IV only.
Step-by-step explanation:
The factors that influence short-term interest rates on government securities include actions by the Federal Reserve, expected future inflation, and the real rate of return. Federal Reserve actions involve decisions about the federal funds rate, which affect other short-term interest rates due to changes in the supply and demand for loanable funds.
Expected future inflation affects the interest rates because lenders require higher interest rates to compensate for the loss of purchasing power over time. The real rate of return is the interest rate that borrowers and lenders negotiate based on the real return on investment, excluding the influence of inflation.
Interest rate risk is not directly a factor in determining short-term government security rates but is a consideration for longer-term investments. When determining monetary policy, the Federal Reserve must balance various economic targets, including controlling inflation and maintaining favorable interest rates to encourage economic growth.
Therefore, the correct option that lists the factors influencing short-term interest rates on government securities is D) I, III and IV only.