Yield Curve Shaping Question

Bit confused on the answer key to the wiley mock.

The question asks how the shape of the curve changes to short rate decrease of 200bps and long rate increase of 100bps

A) Steepening of the yield curve as a result of changes in level and steepness

B) Steepening of the yield curve as a result of changes in steepness AND curvature

I put B as I thought for change in level both ends needed to move in in the same direction?

Answer key:

Since both long and short rates are expected to decline, there will be a change in the level of the yield curve. Further, short rates are expected to decline more than long rates, indicating a change in steepness as well.

Firstly I think the first sentence in the answer is wrong as the long end is increasing but does the answer definitely not include curvature?

There’s nothing to do with curvature here.

So when does curvature come into play?

What question number is this? I might have asked them on the forum. Their mocks have a good amount of errors.

Q18. Wiley AM mock 1 exam.

Also checking is Q16 same paper in Fixed Income correct for the binomial tree? I cannot seem to get any of those numbers at second node

I did the free Wiley mock AM and glaring errors were everywhere. Vignette data was wrong and incorrect Answers taken as correct ones. I didn’t bother with them anymore.

Yes it is an error Rex The Dog in the explanation. He also says that the question should be changed… very confusing.

ANSWER KEY:

Haas’s yield change expectations can best be described as: Steepening of the yield curve as a result of changes in level and steepness Since both long and short rates are expected to decline, there will be a change in the level of the yield curve. Further, short rates are expected to decline more than long rates, indicating a change in steepness as well.

I posted this:----

Is this answer correct? It says both long and short rates are expected to decline. That is wrong. Short is going down, and long is going up. Level only changes if they are going in the same direction, right? Otherwise it is just steepening.

And Received this:-----

Hi, It looks from the explanation in the solution that the question should have stated that short rates decrease by 200bps and the long rate DECREASES by 100bps. This would be a change in the level and the steepness of the yield curve. I think A remains the best answer in this question since there certainly hasn’t been a flattening © and there is no evidence of increased curvature (B), however I’ll let them content team know to make the solution explanation consistent with the question. Thanks for reporting it.

Thanks, I am confused as to when curvature comes into play though? I thought if the short rate decreases and the long increases that there would still be a change in curvature no? I drew out the graphs. When would we see change in curvature?

When short end rates and long end rates move in opposite directions (I believe)

Curvature comes into play when the short and long rates may lower but the mid rates increase. Or if curvature declines, the opposite and the yield curve would become more like a straight line

That’s what I posted originally though and its not correct

Thanks mate

curavture is the movement in the three segments of the yield curve: the short-term and long-term segments rise while the middle-term segment falls or vice versa.