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Chapter 6: Q. 2 (page 190)

Figure 7 shows a number of yield curves at various points in time. Go to http://www.bloomberg.com/ markets/rates/index.html and find the data for U.S. Treasury yields for different maturities. Does the current yield curve fall above or below the most recent one listed in Figure 7? Is the current yield curve flatter or steeper than the most recent one reported in Figure 7?

Short Answer

Expert verified

An upward sloping steeper yield curve represents the short-term interest rate will increase quickly in the future.

Step by step solution

01

Definition

Yield curve is a graph that is plotted with the fixed-interest securities against the time it takes to mature.

02

Explanation

The values are taken from the Bloomberg database and the graph is generated.

Yield curve:

The current yield rate falls above the recent yield. The current yield is steeper than the recent yield.

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Most popular questions from this chapter

Following a policy meeting on March 19,2009the Federal Reserve made an announcement that it would purchase up to $300billion of longer-term Treasury securities over the following six months. What effect might this policy have on the yield curve?

Assuming the expectations theory is the correct theory of the term structure, calculate the interest rates in the term structure for maturities of one to four years, and plot the resulting yield curves for the following paths of one-year interest rates over the next four years:

a. 4%, 6%, 11%, 15%

b. 3%, 5%, 13%, 15%

How would your yield curves change if people preferred shorter-term bonds to longer-term bonds?

In the fall of 2008, AIG, the largest insurance company in the world at the time, was at risk of defaulting due to the severity of the global financial crisis. As a result, the U.S. government stepped in to support AIG with large capital injections and an ownership stake. How would this affect, if at all, the yield and risk premium on AIG corporate debt?

Go to the St. Louis Federal Reserve FRED database, and find data on Moody鈥檚 Aaa corporate bond yield (AAA) and Moody鈥檚 Baa corporate bond yield (BAA). Download the data into a spreadsheet.

a. Calculate the spread (difference) between the Baa and Aaa corporate bond yields for the most recent month of data available. What does this difference represent?

b. Calculate the spread again, for the same month but one year prior, and compare the result to your answer to part (a). What do your answers say about how the risk premium has changed over the past year?

c. Identify the month of highest and lowest spreads since the beginning of the year 2000. How do these spreads compare to the most current spread data available? Interpret the results.

Risk premiums on corporate bonds are usually anticyclical; that is, they decrease during business cycle expansions and increase during recessions. Why is this so?
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