There are three factors that can affect the shape of the Treasury yield curve (r∗t, IPt, and MRPt) and five factors that can affect the shape of the corporate yield curve (r∗t, IPt, and MRPt, DRPt, andLPt). The yield curve reflects the aggregation of the impacts of these factors.
Suppose the real risk-free rate and inflation rate are expected to remain at their current levels throughout the foreseeable future. Consider all factors that affect the yield curve. Then identify which of the following shapes that the U. S. Treasury yield curve can take.
Choose all the options that apply:
i. Upward-sloping yield curve
ii. Inverted yield curve
iii. Downward-sloping yield curve
Identify whether each of the following statements is true or false:
1. If inflation is expected to decrease in the future and the real rate is expected to remain steady, then the Treasury yield curve is downward sloping. (Assume MRP=0.)
2. All else equal, the yield on new bonds issued by a leveraged firm will be less than the yield on the new bonds issued by an unleveraged firm.
3. The yield curve for a BBB-rated corporate bond is expected to be above the U. S. Treasury bond yield curve.
4. Yield curves of highly liquid assets will be lower than yield curves of relatively illiquid assets.