Reading 65: Understanding Yield Spreads - LOS c, (Part 2) black, style, usually, class

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1.If the slope of the yield curve begins to rise sharply, it is usually an indication that:

A)   the rate of inflation is starting to increase or is expected to do so in the near future.

B)   stocks are offering abnormally high rates of return.

C)   the Fed has been aggressively driving up short-term interest rates.

D)   the inflation rate has peaked and will begin to slow down.

2.The liquidity preference theory of the term structure of interest rates implies that the shape of the yield curve should be:

A)   flat or humped.

B)   downward-sloping.

C)   upward-sloping.

D)   variable.

3.Based on the liquidity preference theory, the shape of the yield curve should be:

A)   downward sloping.

B)   flat.

C)   upward sloping.

D)   flat, upward or downward sloping.

4.Generally speaking, an upward-sloping yield curve can be expected when:

A)   the supply of long-term funds falls short of demand.

B)   the supply of long-term funds falls short of demand and investors begin to show a preference for more liquid/less risky short-term securities.

C)   inflationary expectations are beginning to subside.

D)   inflationary expectations are beginning to subside and investors begin to show a preference for more liquid/less risky short-term securities.

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答案和详解如下：

1.If the slope of the yield curve begins to rise sharply, it is usually an indication that:

A)   the rate of inflation is starting to increase or is expected to do so in the near future.

B)   stocks are offering abnormally high rates of return.

C)   the Fed has been aggressively driving up short-term interest rates.

D)   the inflation rate has peaked and will begin to slow down.

The correct answer was A)

According to the expectations hypothesis, higher long-term interest rates and, therefore, upward-sloping yield curves will occur if the rate of inflation starts to heat up or is expected to do so in the near future.

2.The liquidity preference theory of the term structure of interest rates implies that the shape of the yield curve should be:

A)   flat or humped.

B)   downward-sloping.

C)   upward-sloping.

D)   variable.

The correct answer was C)

The liquidity preference theory definitely puts upward pressure on the long end of the term structure and, by itself, would lead to an upward-sloping yield curve.

3.Based on the liquidity preference theory, the shape of the yield curve should be:

A)   downward sloping.

B)   flat.

C)   upward sloping.

D)   flat, upward or downward sloping.

The correct answer was C)

According to the liquidity preference hypothesis, under normal conditions a positive maturity risk premium would cause the yield curve to be upward sloping. The liquidity preference hypothesis implies that long-term bonds normally yield more than short-term bonds because investors prefer to hold more liquid, short-term investments. In addition, borrowers prefer long-term bonds to match the length of their capital needs. Therefore, a maturity risk premium in necessary to entice investors to invest in long-term bonds.

4.Generally speaking, an upward-sloping yield curve can be expected when:

A)   the supply of long-term funds falls short of demand.

B)   the supply of long-term funds falls short of demand and investors begin to show a preference for more liquid/less risky short-term securities.

C)   inflationary expectations are beginning to subside.

D)   inflationary expectations are beginning to subside and investors begin to show a preference for more liquid/less risky short-term securities.

The correct answer was B)

When demand for loanable funds outstrips supply, interest rates can be expected to rise in that (long-term) segment of the market; also, more preference for short-term securities can be expected to drive up long-term rates as the liquidity premium rises. Thus, both circumstances in the answer can be expected to put upward pressure on the long end of the yield curve.