Review Questions for Microeconomic Concepts

1772 WordsFeb 17, 20187 Pages
CHAPTER 6 Review Questions: 6-2 What is the term structure of interest rates, and how is it related to the yield curve? Term structure interest rate is a rate which relates the interest rate or rate of return to the time to maturity. The yield curve is a graph of relationship between the debt’s remaining time to maturity and its yield to maturity. Term structure of interest rate can be shown graphically by yield curve. The shape of the yield curve will show the useful ways to future interest rate expectation. 6-3 For a given class of similar-risk securities, what does each of the following yield curves reflect about interest rates: (a) downward-slopping; (b) upward-slopping; and (c) flat? Which form has been historical dominant? For a given class of similar-risk securities, A downward yield curve shows cheaper long-term borrowing lists than the short-term borrowing lists (inverted yield curve). Upward yield curves represent cheaper short-term borrowing lists than the long-term borrowing lists (normal yield curve). The flat one shows similar borrowing costs for both short-term and long-term loans. 6-4 Briefly describe the following theories of general shape of the yield curve: (a) expectation theory; (b) liquidity preference theory; and (c) market segmentation theory. Expectation theory implies that the yield curve reflects investors’ expectation about the future interest rate and inflation. Higher the future inflation rate, higher the long-term
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