Assume a scenario in which there is no maturity risk premium (MRP-090), the real

Question

Assume a scenario in which there is no maturity risk premium (MRP-090), the real risk-free rate is expected to remain constant, and the yield curve for U.S. Treasury securities is likely to be upward sloping for the next 10 years. Is inflation expected to increase, decrease, or stay the same over the next 10 years? O Decrease Stay the same Increase Consider that the U.S. Treasury bond yield curve was plotted and turned out to be upward sloping. Based on an upward-sloping normal yield curve, identify if the following statement is true or false. If the expectations theory is correct, future short-term rates are expected to be lower than current short-term rates O True O False

Explanation / Answer

1.) Since the yield curve is upwward sloping, this means that the yield is rising over the period. This implies that the bond prices are falling over the period. This is possible if the interest rates rise and inflation has also risen.

Hence, Option-(c) is the right answer.

2.) The given statement is false and the short-term interest rates in future will be higher than the current short term interest rates. This is why the yield curve is having a positive slope indicating increasing yields in the future.

Hence, Option-(b) is the right answer.

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