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.
Question
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.
Solution
The statement D) "The yield curve tends to be inverted as the economy comes out of a recession." is FALSE. Typically, the yield curve steepens (i.e., long-term rates are higher than short-term rates) as the economy comes out of a recession. This is because investors expect growth and inflation to pick up, which would lead to higher interest rates in the future. An inverted yield curve (where short-term rates are higher than long-term rates) is often seen as a predictor of a recession, not a characteristic of a recovering economy.
Similar Questions
Which of the following statements is correct?Group of answer choicesA steepening of the yield curve could reflect a belief that the central bank will in the future conduct a more contractionary monetary policy than previously thoughtA flattening of the yield curve could reflect long-term government bonds suddenly being seen as a less attractive investmentThe yield curve reflects the effect of arbitrage in financial markets as well as what the current interest rate is in the overnight marketThe first and third alternatives above are both correct statements while the second alternative is an incorrect statement.
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
At any time, the slope of the yield curve is affected by:Select one:a.inflationary expectations.b.liquidity preferences.c.the comparative equilibrium of supply and demand in the short-term and long-term market segments.d.Both a and c are correct.e.All a, b and c are correct.
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.
A ________ yield curve predicts a future increase in inflation.A) steeply upward slopingB) slight upward slopingC) flatD) downward sloping
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