We discussed the expectations theory of the term structure of interest rates. What does it says about the factors that influence the shape (upward, downward or flat) of the yield curve. Why does the yield curve sometimes inverts (become downward sloping) even though most of the time it is upward sloping?

We discussed the expectations theory of the term structure of interest rates. What does it says about the factors that influence the shape (upward, downward or flat) of the yield curve. Why does the yield curve sometimes inverts (become downward sloping) even though most of the time it is upward sloping?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter24: Enterprise Risk Management

Section: Chapter Questions

Problem 5Q

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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.
According to the ,long-term interest rates are a function of expected short-term interest rates Maturity theory Expectations theory Market segmentation theory Preferred habitat theory
What is the term for the type of interest rates that constitute the yield curve? What do these interest rates represent?
What is the relationship between forward rates and the market’s expectation of future short rates? Explain in the context of both the expectations hypothesis and the liquidity preference theory of the term structure of interest rates.
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 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.
Why should we care what the Term Structure of Interest Rates looks like? The Expectations Theory of the Term Structure of Interest Rates implies that the term structure is the result of expected inflation rates in the future. What else might cause the term structure to be what it is, that might not be in the Expectations Theory?
Explain how a yield curve is constructed and what its shape reveals about interest rates.
Explain what the yield curve is, what determines its shape, and how you can use the yield curve to help forecast future interest rates.
Which one of the following statements about the term structure of interest rates is true?a. The expectations hypothesis indicates a flat yield curve if anticipated future short-term rates exceed current short-term rates.b. The expectations hypothesis contends that the long-term rate is equal to the anticipated short-term rate.c. The liquidity premium theory indicates that, all else being equal, longer maturities will have lower yields.d. The liquidity preference theory contends that lenders prefer to buy securities at the short end of the yield curve.
Which one of the following statements about the term structure of interest rates is true? A) The expectations hypothesis predicts a flat yield curve if anticipated future short-term rates exceed current short-term rates. B) The liquidity premium theory contends that lenders prefer to buy securities at the ghort-term end of the curve. C) The expectations hypothesis contends that the long-term spot rate is equal to the short-term rate. D) The liquidity premium theory indicates that, all else being equal, longer maturity bonds will have lower yields.
How does the inflation premium shape the yield curve?