15. Factors that impact the yield curve Aa Aa There are three factors that can a
ID: 2819172 • Letter: 1
Question
15. Factors that impact the yield curve Aa Aa There are three factors that can affect the shape of the Treasury yield curve (r*t, IPt, and MRPt) and five factors that can affect the shape of the corporate yield curve (rIPt, MRPt, 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 U.S. Treasury yield curve can take. Check all that apply Downward-sloping yield curve Upward-sloping yield curve Inverted 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.) 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 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: INTEREST RATE 1% 15 20 2530 YEARS TO MATURITY 10 Based on an upward-sloping normal yield curve as shown, which of the following statements is correct? There is a positive maturity risk premium. Inflation must be expected to increase in the future O If the pure expectations theory is correct, future short-term rates are expected to be higher than current short-term rates. Pure expectations theory must be correct.Explanation / Answer
1. It will be upward slopping.
If inflation and risk free rate remain same, the only factor left which can effect yield curve is Market Risk Premium. Also, the market risk premium increase as the maturity increase. So upward slopping
1st statement is True.
If inflation is expected to decrease and real rate remains the same and also MRP = 0, Then the slop will be downwards
2nd statement is False
As the leverage increase, the risk assoiated with the firm increases, which wil increase the yield
3rd statement is True
BBB rated company will have higher yield than A rate bond for the same maturity because BBB rated company will be more risky investment than A rated company
4th statement is True
Highly liquid assets are less risky than low liquid assets. So they will have lower yield
Answer is A
In the graph, as the maturity is increasing, the rate is also increasing. This means the maturity risk premium is positive
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.