http://www.businessinsider.com/us-treasury-yield-curve-evolution-1982-2014-2014-
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Question
http://www.businessinsider.com/us-treasury-yield-curve-evolution-1982-2014-2014-12
Internet Assignment: Yield Curve Attached Files The Yield Curve 150717 docx (13 589 KB) Internet Assignment 1: Yield Curve Assignment On the internet watch a "video of the yie curve at http//www.businessinsider 1982-2014-2014-12. Use the yield curve video demonstration to answer the following questions a. Describe briefly, what the yield curve looked like for most of the time period covered (normal, steep, inverted, flat) b. Describe briefly, what the yield curve looks like currently sed upon the demonstration, do short-term rates or long-term rates tend to be more volatile? Explain Describe what happened to interest rates between January 2004 and have happened if you took out successive short-term loans (such as an adjustable rate mortgage) during that period? c. Bas January 2007, What would t 1 stable rate mort age based upon short-term rates wou you bere o n e current d. Look at the current shape of the yield curve. If you have a short-term loan (or an shape of the yield curve? Explain. Download the attached file for information k at e an t shape of the yed a you have a slen erm an oran a
Explanation / Answer
The yield curve is a graphical demostration of different interest rates paid on bonds with varied maturity periods, but same risk level. It is primarily used for U.S treasury bonds to know the future yield that investors can expect in the short term and long term.
a. By carefully observing the video, the yield curve looks inverted for most of the time period covered. This can be attributed to different phases of lending and change in lending policies. The interest rates continued to fall during the time periods when mortgage lending and mortgage securities were encouraged on a larger scale. This consequentially lead to periods of economic recession due to which investors felt that yields on longer-term bonds may fall. If observed closely, the U.S treasury yield took an inverted yield curve just before the dot com bubble burst in 2000. The long-term bonds were being demanded by the prediction of lower interest rates in the future and this made the yields negative.
b. Over the past few years, the yield curve looks flat. After several stints of recession and unrestricted lending, the treasury investors started becoming cautious. There was little difference between short-term and long-term rates for bonds with identical level of risk. After the subprime mortgage crisis in 2008, the investors were concerned about the macroeconomic scenario. They expected the federal reserve to increase the interest rates in near future and hence saw little benefit in holding the instruments.
c. Short-term bonds tend to have yields that are more volatile compared to long-term bonds. Bonds always carry two types of risk with them 1. inflation risk 2. interest rate risk. Investors and traders are influenced by the interest rates announced by the Federal Reserve on a quarterly basis. The graph shows a normal yield curve between January 2004 and 2007. A steep positive yield curve was an indication that investors would like to reap the benefits of investing in short term and expected a higher rate of return for higher risk (i.e., investing for a longer term). The short-term loans were lent out at a less interest rate due to which the yield increased. Hence, parking the funds for a short-term loans such as mortgage laons would have surely fetched higher yield.
d. The current shape of the yield curve is flat .Hence, investing in short-term and long term bonds carry the same level of risk. Therefore, the benefits are more or less the same going by the current shape of the yield curve.
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