There are three factors that can affect the shape of the Treasury yield curve (r*t, IPt, and MRP) and five factors that can affect the shape of the corporate yield curve (r*t, IPt, MRP, 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 US Treasury yield curve can take. Check all that apply. Inverted yield curve Downward-sloping yield curve Upward-sloping yield curve Identify whether each of the following statements is true or false. Statements 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 BBB-rated corporate bond is expected to be above the US Treasury bond yield curve. Yield curves of highly liquid assets will be lower than yield curves of relatively illiquid assets. True False O O 00 O O O O
There are three factors that can affect the shape of the Treasury yield curve (r*t, IPt, and MRP) and five factors that can affect the shape of the corporate yield curve (r*t, IPt, MRP, 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 US Treasury yield curve can take. Check all that apply. Inverted yield curve Downward-sloping yield curve Upward-sloping yield curve Identify whether each of the following statements is true or false. Statements 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 BBB-rated corporate bond is expected to be above the US Treasury bond yield curve. Yield curves of highly liquid assets will be lower than yield curves of relatively illiquid assets. True False O O 00 O O O O
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:**A US Treasury Yield Curve Analysis**
The graph above displays a US Treasury yield curve, illustrating the relationship between interest rates (y-axis) and years to maturity (x-axis).
**Graph Details:**
- **Y-Axis:** Displays the interest rate in percentage (%), ranging from 0 to 6.
- **X-Axis:** Shows the years to maturity, extending from 0 to 30 years.
- The curve is upward-sloping, indicating that longer maturity bonds have higher interest rates.
**Question for Analysis:**
Based on the upward-sloping normal yield curve shown, which of the following statements is correct?
- ○ Inflation must be expected to increase in the future.
- ○ There is a positive maturity risk premium.
- ○ Pure expectations theory must be correct.
- ○ If the pure expectations theory is correct, future short-term rates are expected to be higher than current short-term rates.
![### Factors Affecting the Treasury and Corporate Yield Curves
There are three factors that can impact the shape of the Treasury yield curve: the real risk-free rate (\(r^*_{tr}\)), expected inflation (\(IP_{t}\)), and the maturity risk premium (\(MRP_{t}\)). There are five factors that can influence the shape of the corporate yield curve: the real risk-free rate (\(r^*_{tr}\)), expected inflation (\(IP_{t}\)), the maturity risk premium (\(MRP_{t}\)), the default risk premium (\(DRP_{t}\)), and the liquidity premium (\(LP_{t}\)). The yield curve is a reflection of the combined effects of these factors.
#### Yield Curve Shapes
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 the US Treasury yield curve can take. Check all that apply:
- [ ] Inverted yield curve
- [ ] Downward-sloping yield curve
- [ ] Upward-sloping yield curve
#### True or False Statements
Identify whether each of the following statements is true or false:
| Statements | True | False |
|--------------------------------------------------------------------------------------------------------------------------------------------|------|-------|
| 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 BBB-rated corporate bond is expected to be above the US Treasury bond yield curve. | | |
| Yield curves of highly liquid assets will be lower than yield curves of relatively illiquid assets. | | |
#### Graph Explanation
A US Treasury yield curve is plotted in the following graph:
- **Graph Description:** The graph plots interest rates against time to maturity. Typically, the vertical axis represents the interest rate, and the horizontal axis represents the time to maturity. The curve shown would reflect how interest rates vary over different maturities for US Treasury securities.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F1449914f-8eca-43bc-87ff-7e50e88e5bf7%2Fae611fea-9ee5-4e6c-b3ef-fd24a9927fd5%2Fa3tjg7f_processed.jpeg&w=3840&q=75)
Transcribed Image Text:### Factors Affecting the Treasury and Corporate Yield Curves
There are three factors that can impact the shape of the Treasury yield curve: the real risk-free rate (\(r^*_{tr}\)), expected inflation (\(IP_{t}\)), and the maturity risk premium (\(MRP_{t}\)). There are five factors that can influence the shape of the corporate yield curve: the real risk-free rate (\(r^*_{tr}\)), expected inflation (\(IP_{t}\)), the maturity risk premium (\(MRP_{t}\)), the default risk premium (\(DRP_{t}\)), and the liquidity premium (\(LP_{t}\)). The yield curve is a reflection of the combined effects of these factors.
#### Yield Curve Shapes
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 the US Treasury yield curve can take. Check all that apply:
- [ ] Inverted yield curve
- [ ] Downward-sloping yield curve
- [ ] Upward-sloping yield curve
#### True or False Statements
Identify whether each of the following statements is true or false:
| Statements | True | False |
|--------------------------------------------------------------------------------------------------------------------------------------------|------|-------|
| 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 BBB-rated corporate bond is expected to be above the US Treasury bond yield curve. | | |
| Yield curves of highly liquid assets will be lower than yield curves of relatively illiquid assets. | | |
#### Graph Explanation
A US Treasury yield curve is plotted in the following graph:
- **Graph Description:** The graph plots interest rates against time to maturity. Typically, the vertical axis represents the interest rate, and the horizontal axis represents the time to maturity. The curve shown would reflect how interest rates vary over different maturities for US Treasury securities.
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