Macroeconomics (9th Global Edition)
9th Edition
ISBN: 9780134141534
Author: Andrew B. Abel, Ben Bernanke
Publisher: Pearson Global Edition
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Chapter 7, Problem 1WWMD
To determine
To ascertain: Graphical representation of yield curve and impact on term structure of interest rates over past years.
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An inverted yield curve predicts that short-term interest rates a. are expected to rise in the future. b. will rise and then fall in the future. c. will remain unchanged in the future. d. will fall in the future. e. None of the above
: Show graphically the effect of a rise in expected inflation on interest rates in the bond market.
If expectations of future short-term interest rates suddenlyfell, what would happen to the slope of the yield curve?
Chapter 7 Solutions
Macroeconomics (9th Global Edition)
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- What are the key factors that most affect the level and shape of the yield curve?View Solution:arrow_forwardprove that bond yields and bond prices are inversely related?arrow_forwardA large money center bank uses the US treasury yield curve to determine the appropriate level for its lending rates. To compensate for the costs of making a loan, the bank needs to charge 1.8% point more than the expected future interest rate on a Treasury security with the same maturity if it is to make a profit. The manager is considering a loan request from a customer seeking a one year loan that starts 2 years from today. If the two-year Treasury Strip rate is 4.1% and the three-year Treasury strip rate is 5.5%, at what minimum rate should the manager be willing to make the loan commitment?Enter your answer as a % to two decimal places. Assume the expectation theory of rates is valid and all liquidity premiums are zero.arrow_forward
- Based on economics forecast and analysis, one year Treasury bill rates and liquidity premiums for the next four years are expected to be as follows 5.65%, 6.75% 6.85% 7.15% respectively and the liquidity premium from 2nd year to 4th year is 0.05%, 0.10%, 0.12%. Using the liquidity premium theory, plot the current yield curve. Make sure you label the axes on the graph and identify the four annual rates on the curve both on the axes and on the yield curve itself.arrow_forwardfrom December 2015 through December 2018, , the Fed raised the target level for the federal funds rate nine times. While short-term interest rates increased substantially, long-term rates increased only slightly (making the yield curve flatter, or even inverted). Show and explain why short-term and long-term interest rates have not moved togetherarrow_forwardPlease answer each of the following questions in detail and provide in-text citations in support of your argument. Include examples whenever applicable. Make sure to provide examples for each of the questions below. 2. Describe the meaning of the yield curve. Verify how the shape of the yield curve provides predictions on the economy in future years. Please visit the US Governments’arrow_forward
- Why are bond prices and interest rates inversely related?arrow_forwardWhich of the following is NOT a primary factor that influences the shape of the yield curve? a. International interest rates b. Level of business activity c. Federal budget surplus d. Immigration e. Federal Reserve policiesarrow_forwardAs a result of this flight to liquidity, the interest rate in the 20-year Treasury bonds market ________________ ( decreases/ remains the same/ increases) , while the interest rate in the T-bill market ________________ ( decreases/ remains the same/ increases) . Consequently, the default risk premium spread ________________ ( decreases/ remains the same/ increases)arrow_forward
- A “normal” yield curve is upward sloping because investors expect Select one: A. Lower interest rates in the future due to an expanding economy B. Lower interest rates in the future due to a contracting economy C. Higher interest rates in the future due to a contracting economy D. Higher interest rates in the future due to an expanding economyarrow_forwardWhat are the advantages and disadvantages of quantitative easing as an alternative to conventional monetary policy when short-term interest rates are at the zero lower-bound?arrow_forwardWhat is the best explanation of liquidity premium? What is suggested by an upward sloping yield according to segmented market theory? Explainarrow_forward
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