Question

What is the shape of the yield curve given in the following term​ structure? What expectations are investors likely to have about future interest​ rates?

Term	1 year	2 years	3 years	5 years	7 years	10 years	20 years
Rate​ (EAR, %)	1.97	2.41	2.74	3.34	3.78	4.14	4.96

What is the shape of the yield curve given the term​ structure?  ​(Select the best choice​ below.)

A.

The yield curve is an inverted yield curve​ (decreasing).

B.

The yield curve is a normal yield curve​ (increasing).

C.

It is hard to tell because we are not given an EAR for every year.

D.

The yield curve is a flat yield curve.

What expectations are investors likely to have about future interest​ rates?  ​(Select the best choice​ below.)

A.

Interest rates might decrease in the future.

B.Interest rates will likely stay the same in the future.

c. the yield curve provides no clues as to future interest rate levels.

D.

Interest rates might rise in the future.

Answer 1

Question - (1)

Select - B ..........The yield curve is a normal yield curve​ (increasing).

Normal yield curve means, upward sloping or a curve with positive slope where we have lower interest rates for short term debts and higher interest rate for long term debts. This situations is considered as normal hence called normal yield curve. The given table had EAR increasing with duration.

Question - (2)

Select - D .......Interest rates may raise in future

From a normal yield curve, future expectation on interest rates is increasing. For a inverted yield curve future expectation on interest rates is decreasing.