15. Factors that impact the yield curve Aa Aa There are three factors that can a

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 MRP) and five factors that can affect the shape of the corporate yield curve (r*., IP, MRP, DRP, 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 curve. Then identify which of the following shapes that the U.S. Treasury yield curve can take. Check all that apply. Upward-sloping yield curve Inverted 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 o.) 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 0 0 o

Explanation / Answer

The yield curve can take still take all the shapes due to differing risk premia and liquidity premia.

True as the future rates shall be lower. It is a sign of impending recession

False, it shall be more as the leveraged firm has more risk

True as BBB is more risky than US treasury

True, mor eliquidity leads to a lesser yield

Correct option are:
There is a positive risk premium as yiled curve is upward moving
Inflation must be expected to increase in future because the yield curve is increasing.

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