The existence of an upward-sloping yield curve suggests that:Select one:a.bonds should be selling at a discount to par value.b.bonds will not return as much as common stocks.c.interest rates will be increasing in the future.d.real interest rates will be increasing soon.
Question
The existence of an upward-sloping yield curve suggests that:Select one:a.bonds should be selling at a discount to par value.b.bonds will not return as much as common stocks.c.interest rates will be increasing in the future.d.real interest rates will be increasing soon.
Solution
The answer is c. interest rates will be increasing in the future.
Here's why:
An upward-sloping yield curve, also known as a normal yield curve, shows that long-term interest rates are higher than short-term interest rates. This is the most common shape for the yield curve and is considered normal because investors usually require a higher return for holding a bond for a longer period due to the greater risk of price fluctuations and other uncertainties over time.
This shape of the yield curve often suggests that investors expect interest rates to rise in the future. The rationale is that if investors expect higher interest rates (and thus higher yields on newly issued bonds) in the future, they will demand higher yields on long-term bonds to compensate for the lower yields they could potentially receive if they were to hold short-term bonds and reinvest in new bonds in the future.
Similar Questions
Which of the following items will likely not affect the shape of the yield curve?Group of answer choicesMore efficient transaction systems of financial assetsThe market experiencing increasing concerns about the financial health of the economyAn sudden increase in demand for long-term bondsThe market forming a more optimistic outlook of the future of the economy
1. The yield curve is generally upward sloping. That is, interest rates on government bonds increase with the term to maturity of such bonds. Why? Occasionally, the yield curve is inverted. That is, interest rates on government bonds with longer terms to maturity are lower than the interest rates on government bonds with shorter terms to maturity. Why? Give answer from economics perspective in bullet points.
Which of the following statements is FALSE? A) The shape of the yield curve will be strongly influenced by interest rate expectations. B) We can use the term structure to compute the present and future values of a risk-free cash flow over different investment horizons. C) It is important to use a discount rate that matches both the horizon and the risk of the cash flows. D) The yield curve tends to be inverted as the economy comes out of a recession. E) None of the above is false.
Which of the following statements is correct? Group of answer choices A steepening of the yield curve could reflect a belief that the central bank will in the future conduct a more restrictive monetary policy than previously thought. The yield curve reflects the relationship between existing short, medium and longer term interest rates, independent of expectations about future interest rates. The yield curve reflects the effect of arbitrage in financial markets not what the current interest rate is in the overnight market. A steepening of the yield curve could reflect long-term government bonds suddenly being seen as a more attractive investment.
A ________ yield curve predicts a future increase in inflation.A) steeply upward slopingB) slight upward slopingC) flatD) downward sloping
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