7. Factors that impact the yield curve There are three factors that can affect t

Question

7. Factors that impact the yield curve There are three factors that can affect the shape of the Treasury yield aurve (*t, IPt, and MRP) and five factors that can affect the shape of the corporate yield aurve (t, IPt, MRPt, DRPt, and LP). 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 aurve. Then identify which of the following shapes that the U.S. Treasury yield curve can take. Check all that apply. Inverted yield curve Upward-sloping yield curve Downward-sloping yield curve 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.) The default risk on Walmart's short-term debt will be higher than the default risk on its O long-term debt The yield curve for a BBB-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:

Explanation / Answer

Upward sloping yield curve

Detail :  The real risk-free rate and inflation rate are expected to remain at their current levels, but Security with longer maturity should have higher maturity risk premiums. Therefore, as the maturity risk premiums are positive, the Treasury yield curves are upward sloping. The yield curve is neither downward sloping nor inverted because the maturity risk premium cannot decrease with maturity.

True

False

True

True

=> If the purre expectations theory is correct, future short-term rate are expected to be higher than current short-term rates.

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