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Investors expect short-term rates to decrease in the near future. However, they demand positive liquidity premium. Is the resulting yield curve going to be upward or downward slopping? Explain why

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter11: Risk-adjusted Expected Rates Of Return And The Dividends Valuation Approach

Section: Chapter Questions

Problem 3QE

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Investors expect short-term rates to decrease in the near future. However, they demand positive liquidity premium. Is the resulting yield curve going to be upward or downward slopping? Explain why

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Under the expectations hypothesis, if the yield curve is upward-sloping, the market must expect an increase in short-term interest rates. True/false/uncertain? Why?
Which of the following statements is CORRECT about the yield curve? A) The yield curve shows the behaviour of interest rate forecasts. B) When short-term rates are lower than long-term rates, there is a downward-sloping yield curve. C) A downward-sloping yield curve shows that investors demand an additional risk premium for lending money over the long term. D) A downward-sloping yield curve indicates that the market expects a future rise in interest rates.
If the yield curve is downward sloping, what would the expectations theory suggest about expected future short-term interest rates?
Which of the following is consistent with the pure expectations theory of the yield curve? Check all that apply. A downward-sloping yield curve suggests that the market thinks interest rates in the future will be higher than they are today. ✓ A downward-sloping yield curve suggests that the market thinks interest rates in the future will be lower than they are today. A flat yield curve suggests that the market thinks interest rates in the future will be the same as they are today. A flat yield curve suggests that the market thinks interest rates in the future will be higher than they are today. Maria would like to invest a certain amount of money for two years and considers investing in a one-year bond that pays 6 percent and a two-year bond that pays 9 percent. Maria is considering the following investment strategies: Strategy A: In the first year, buy a one-year bond that pays 6 percent. Once that bond matures, buy another one-year bond that pays the forward rate. Strategy B: In the…
Explain please
What is the reason for investors to track moves in the yield curve? Please discuss in more depth and maybe more practical examples.
Consider the liquidity premium theory. If a yield curve looks like the one shown here, what is the market predicting about the movement of future short-term interest rates? Distinguish between the flat part of the curve and the part with the increasing slope. Yield to maturity Term to maturity
Which of the following best explains an upward sloping Treasury yield curve? A. Maturity risk is expected to decline in the future B. Long-term interest rates are more volatile than short-term rates C. Inflation risk premiums are higher for longer terms to maturity D. Default risk is higher for longer terms to maturity
Which of the following is correct with regards to Theories of Term Structure? When the shape of the yield curve depends on investors’ expectations about prospective prevailing interest rates, the Pure Exception Theory is being applied. When the economic outlook is improving, the yield curve inverts as it reflects no changes in inflation premium. The liquidity preference theory suggests that long-term rates are generally higher than short-term rates since investors perceive more liquidity in long-term investments. Under the Market segmentation theory, there is an apparent relationship between the yield curve and the prevailing rate of returns in each market segment.
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 US Treasury yield curve can take. Check all that apply. Downward-sloping yield curve Inverted yield curve Upward-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.) 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 US Treasury bond yield curve. Yield curves of highly liquid assets will be lower than yield curves of relatively illiquid assets.
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