A US Treasury yield curve is plotted in the following graph:**Graph Description:**- The graph displays the relationship between interest rates and years to maturity for US Treasury bonds.- The x-axis is labeled "YEARS TO MATURITY" and ranges from 0 to 30 years.- The y-axis is labeled "INTEREST RATE (%)" and ranges from 0% to 6%.- The curve depicted is upward-sloping, starting around 2% and approaching 6% as maturity increases to 30 years.**Question:**Based on an upward-sloping normal yield curve as shown, which of the following statements is correct?1. Pure expectations theory must be correct.2. If the pure expectations theory is correct, future short-term rates are expected to be higher than current short-term rates.3. There is a positive maturity risk premium.4. Inflation must be expected to increase in the future. **Factors Affecting the Treasury Yield Curve**There are three factors that can affect the shape of the Treasury yield curve: the real risk-free rate (\(r^*\)), the expected inflation rate (\(IP_t\)), and the maturity risk premium (\(MRP_t\)). Additionally, five factors can influence the shape of the corporate yield curve: \(r^*_t\), \(IP_t\), \(MRP_t\), the default risk premium (\(DRP_t\)), and the liquidity premium (\(LP_t\)). The yield curve reflects the aggregation of impacts from these factors.**Current Conditions and 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**Evaluate the Truthfulness of the Following Statements**Identify whether each of the following statements is true or false.1. 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.) - [ ] True - [ ] False2. 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. - [ ] True - [ ] False3. The yield curve for a BBB-rated corporate bond is expected to be above the US Treasury bond yield curve. - [ ] True - [ ] False4. Yield curves of highly liquid assets will be lower than yield curves of relatively illiquid assets. - [ ] True - [ ] False

A yield curve is a line that depicts the rate of interest on debt. It displays the interest rates of…

US Treasury yield curve is plotted in the following graph: INTEREST RATE (%) 6 5 0 5 10 15 20 25 YEARS TO MATURITY 30 sed on an upward-sloping normal yield curve as shown, which of the following statements is correct? O 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. There is a positive maturity risk premium. O Inflation must be expected to increase in the future.

US Treasury yield curve is plotted in the following graph: INTEREST RATE (%) 6 5 0 5 10 15 20 25 YEARS TO MATURITY 30 sed on an upward-sloping normal yield curve as shown, which of the following statements is correct? O 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. There is a positive maturity risk premium. O Inflation must be expected to increase in the future.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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