1. explain the yield curve and its types? 2. risk premiums on corporate bonds are usually...
1. explain the yield curve and its types?
2. risk premiums on corporate bonds are usually anti cyclical, that is, they decrease during Business cycle expension and increase during recessions, why is this?
3. if yield curves, on average, were flat, what would they say about liquidity premiums in term structure? would you be more the pure expectations theory?
Homework Answers
1. A yield curve is a graphical representation of interest rates for different maturity bonds. It is a curve in which different interest rates are plotted for different maturity.
Yield curve could be Normal, Inverted, Flat , Steep.
2. Risk premium on bonds are anti cyclical as people are fearful to invest in bonds during recessionary periods so risk premium goes up and people are willing to invest in Bonds during expansion cycles so risk premium comes down.
3.If yield curves are flat , they reflect that short term as well as long term maturity bonds will yield same interest rate and liquidity premium will be low. Pure expection theory won't be applicable as short term & long term interest rates are same .
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