181 $
© 2014 Pearson Canada Inc.$- What is the shape of the yield curve when short-term rates are expected to rise sharply in the
mid-term and moderately in the long-term?
Answer:
The students must draw a yield curve like the one above and explain that the sharp increase in
short-term rates in the mid-term is shown as the part of the yield curve with a steep slope and the
moderate increase in the long-term is the later part of the yield curve.
Diff: 2 Type: SA Page Ref: 127 - 128
Skill: Applied
Objective List: 6.2 Explain how interest rates on bonds with different maturities are related
- When interest rates on 1- 2 - 3 - 4 - 5 year bonds are 2.0, 2.1, 2.3, 2.4, and 2.5 percent
respectively, what information do we derive on future economic growth and real output?
Answer: According to these interest rates, the yield curve is gently upward sloping, indicating
that short-term interest rates are not expected to change significantly in the next 5 years. We do
know that periods of economic growth and output booms are associated with rising interest rates,
and recessions are associated with low interest rates. As the yield curve is found to be an
accurate predictor of the business cycle, we would expect no significant changes in real output
over the next 5 years.
Diff: 3 Type: SA Page Ref: 128 - 129
Skill: Applied
Objective List: 6.2 Explain how interest rates on bonds with different maturities are related