(6) (20 POINTS) (a) (5 POINTS) Explain what a yield curve shows. What must be he
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(6) (20 POINTS) (a) (5 POINTS) Explain what a yield curve shows. What must be held constant among the bonds whose interest rates are shown on a yield curve? (b) (10 POINTS) Some years ago, the Fed simultaneously sold short-term Treasury securities and purchased long-term Treasury securities. What does this policy do to short-term and long- term interest rates? You must provide appropriate demand and supply graphs and explain your answer. Label the graphs properly. (c) (5 POINTS) What does this policy do the yield curve? Explain your answerExplanation / Answer
a)A yield curve is a curve which charts the rates of interest, at a particular timepoint, of bonds having equivalent credit quality but distinct dates of maturity. The most common one compares the 3-month, 2-year, 5-year & thirty-year Treasury debt. This curve is utilized as a yardstick for other debts in the marketplace, like rates for bank lending ,& is also utilized to forecast alterations in economic output & economic growth. Its shape provides an idea of future rate of interest alterations & economic activity. There are 3 chief kinds of curve shapes- normal yield curve, inverted & flat. A normal shape is when bonds having longer maturity have a better yield contrasted to short-run bonds on account of the risks related with time. An inverted shape is when the short-run yields are more than the long-run ones, that can be a signal of forthcoming slump. In a flat curve, the short- & long-run yields are very close to one other, which is also a forecaster of an economic changeover .
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