# the yield curve

1) If one expects the inflation premium to be 2%, the default risk premium to be 1%, and the real interest rate to be 4%, what interest rate would you expect to observe in the market place under the simplest form of market rates?

a) 4% b) 7 % c) 2% d) 1%

2) What is the real rate of interest if the nominal rate of interest is 15%, the inflation premium is 3%, the default is 3%, and the maturity risk premium is 3%, and the liquidity premium is 2%

a) 3% b) 4% c) 5% d) none of the above.

3) When investors expect ______ inflation rates, they will require ______

nominal interest rates so that a real rate of return will remain after the inflation.

a) higher, higher. b) higher, lower. c) lower higher d) none of the above.

4) Assume that these current yields exist: long term government securities yield 9%, 5 year treasury securities yield 8.5%, and 1 year treasury bills yield 8%. What type of yield curve is depicted?

a) downward sloping b) flat or level c) upward sloping d) u shaped

5) What yield curve shape is depicted if intermediate term tresury securities yield 10%, short term treasuries yield 10.5%, and long term treasuries yield 9.5% ?

a) downward sloping b) flat or level c) upward sloping d) u shaped.

https://brainmass.com/economics/inflation/177480

#### Solution Preview

1) If one expects the inflation premium to be 2%, the default risk premium to be 1%, and the real interest rate to be 4%, what interest rate would you expect to observe in the market place under the simplest form of market rates?

a) 4% b) 7 % c) 2% d) 1%

Formula of market Return:

k = k* + IP + DRP + LP + MRP

where, k* = real interest rate = 4%

IP = inflation premium = 2%

DRP = default risk premium = 1%

LP = liquidity premium = 0

MRP= maturity risk premium = 0

Then:

k = k* + ...

#### Solution Summary

Explicate the yield curve.

Yield Curve Predictor

1. Discuss the Yield Curve and its usefulness in predicting recessions. Did the Yield Curve from 2004 through 2007 predict the Great Recession of 2008-2010? Based on the current Yield Curve, detail your prediction for the U.S. economy for the next two years.

2. Discuss ways in which an investor can take advantage of a flat or inverted yield curve. Give three current, specific real-world examples in your discussion.

View Full Posting Details