2] Yield Curve Exercises (15 points) 2.1] Consider the following set of interest

Question

2] Yield Curve Exercises (15 points) 2.1] Consider the following set of interest rates: Brazil Brazil BrazilBrazil 6-month bond 5-year bond 7-year bond 10-year bond yield in BRLyield in JPY yield in USD yield in EUR September 3, 7.12% 2.25% 4.42% 11 .99% 2018 Which statement is appropriate? (a) The yield curve is normal; (b) The yield curve is inverted; (c) This is not a yield curve. 12.2] Consider the following set of interest rates: Barclays Bank Barclays Bank Barclays Bank Barclays Bank 6-month bond 2-year bond 7-year bond 10-year bond yield in USS yield in US$ yield in Us$ yield in US$ September 1, | 3.01% 3.29% 4.14% 4.60% 2018 Which statement is appropriate? (a) The yield curve is normal; (b) The yield curve is inverted; (c) This is not a yield curve.

Explanation / Answer

(21) The information provided is off bonds from the same country of origin i.e Brazil but denominated in different currencies. Hence, the risks associated with each of these bonds are different owing to the differing currency risks. Therefore, the interest rates given cannot form an yield curve.

Hence, the correct option is (c).

(22) The information provided gives the interest rates for Brazilian origin bonds, all denominated in US $ albeit with different maturities and yet possessing the same credit quality(as all of them are Barclays Bank bonds). Hence, the interest rates provided by them indeed do form an yield curve. Further, the yields for the bonds increase with an increase in bond maturity. Therefore, the yield curve is upward sloped and hence normal. The correct option is (a).

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