7. Factors that impact the yield curve Aa Aa There are three factors that can affect the shape of the Treasury yield curve (rt, IPt, and MRPt) and five factors that can affect the shape of the corporate yield curve (r*t, IPt, MRPt, DRPt, and LPt). The yield curve reflects the aggregation of the impacts from these factors. Suppose the real risk-free rate and inflation rate are expected to remain at their current levels throughout the foreseeable future. Consider all factors that affect the yield curve. Then identify which of the following shapes that the U.S. Treasury yield curve can take. Check all that apply Upward-sloping yield curve Downward-sloping yield curve Inverted yield curve Identify whether each of the following statements is true or false. False Statements True If inflation is expected to decrease in the future and the real rate is expected to remain steady, then the Treasury yield curve is downward sloping. (Assume MRP 0.) All else equal, the yield on new bonds issued by a leveraged firm will be less than the yield on the new bonds issued by an unleveraged firm. The yield curve for a AA-rated corporate bond is expected to be above the U.S. Treasury bond yield curve. Yield curves of highly liquid assets will be lower than yield curves of relatively illiquid assets. A U.S. Treasury yield curve is plotted in the following graph: INTEREST RATE (% 5 4 3 1 5 10 15 20 25 30 YEARS TO MATURITY Based on an upward-sloping normal yield curve as shown, which of the following statements is correct? There is a positive maturity risk premium. Inflation must be expected to increase in the future If the pure expectations theory is correct, future short-term rates are expected to be higher than current short-term rates. Pure expectations theory must be correct.
7. Factors that impact the yield curve Aa Aa There are three factors that can affect the shape of the Treasury yield curve (rt, IPt, and MRPt) and five factors that can affect the shape of the corporate yield curve (r*t, IPt, MRPt, DRPt, and LPt). The yield curve reflects the aggregation of the impacts from these factors. Suppose the real risk-free rate and inflation rate are expected to remain at their current levels throughout the foreseeable future. Consider all factors that affect the yield curve. Then identify which of the following shapes that the U.S. Treasury yield curve can take. Check all that apply Upward-sloping yield curve Downward-sloping yield curve Inverted yield curve Identify whether each of the following statements is true or false. False Statements True If inflation is expected to decrease in the future and the real rate is expected to remain steady, then the Treasury yield curve is downward sloping. (Assume MRP 0.) All else equal, the yield on new bonds issued by a leveraged firm will be less than the yield on the new bonds issued by an unleveraged firm. The yield curve for a AA-rated corporate bond is expected to be above the U.S. Treasury bond yield curve. Yield curves of highly liquid assets will be lower than yield curves of relatively illiquid assets. A U.S. Treasury yield curve is plotted in the following graph: INTEREST RATE (% 5 4 3 1 5 10 15 20 25 30 YEARS TO MATURITY Based on an upward-sloping normal yield curve as shown, which of the following statements is correct? There is a positive maturity risk premium. Inflation must be expected to increase in the future If the pure expectations theory is correct, future short-term rates are expected to be higher than current short-term rates. Pure expectations theory must be correct.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:7. Factors that impact the yield curve
Aa Aa
There are three factors that can affect the shape of the Treasury yield curve (rt, IPt, and MRPt) and five factors that
can affect the shape of the corporate yield curve (r*t, IPt, MRPt, DRPt, and LPt). The yield curve reflects the
aggregation of the impacts from these factors.
Suppose the real risk-free rate and inflation rate are expected to remain at their current levels throughout the
foreseeable future. Consider all factors that affect the yield curve. Then identify which of the following shapes that
the U.S. Treasury yield curve can take. Check all that apply
Upward-sloping yield curve
Downward-sloping yield curve
Inverted yield curve
Identify whether each of the following statements is true or false.
False
Statements
True
If inflation is expected to decrease in the future and the real rate is expected to
remain steady, then the Treasury yield curve is downward sloping. (Assume MRP 0.)
All else equal, the yield on new bonds issued by a leveraged firm will be less than the
yield on the new bonds issued by an unleveraged firm.
The yield curve for a AA-rated corporate bond is expected to be above the U.S.
Treasury bond yield curve.
Yield curves of highly liquid assets will be lower than yield curves of relatively illiquid
assets.
Transcribed Image Text:A U.S. Treasury yield curve is plotted in the following graph:
INTEREST RATE (%
5
4
3
1
5
10
15
20
25
30
YEARS TO MATURITY
Based on an upward-sloping normal yield curve as shown, which of the following statements is correct?
There is a positive maturity risk premium.
Inflation must be expected to increase in the future
If the pure expectations theory is correct, future short-term rates are expected to be higher than current
short-term rates.
Pure expectations theory must be correct.
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