Based on the most important economic forces that would affect the curve, what is the most likely (typical) shape of the interest rate term structure at a time after the business cycle has reached a peak and the economy is headed downward, possibly entering a recessionary period? a. A dramatic downward-sloping, inverted yield curve. b. A positive-sloping yield curve. c. A flatter yield curve, possibly even mildly inverted. Good question… explain, don’t just pick.
definitely not b, i would guess c but would understand if it’s a
I would go with A because if the economy is heading down then FI is valuable and as more people start buying the bonds, yields will decline causing a dramatic downward slop and an inverted yield curve I’m wrong…FI is my weak spot
Should be C When the economy will likely go downward the market expects lower rates in the future. When there es a deep recession expected the yield curve may be more downward sloping.
C for me, between A and C. B is out for sure. as far as i know from the real world, an inverted yield curve signals the beginning of a recession, so if the economy is going into the crapper that factor has to be there because investors are looking for safety in the short-term vs. long-term unknowns. now unless 9/11 happens, it would highly unlikely for the curve to dramatically drop in an inverted V shape. usually recession happens gradually and is detected later rather than earlier.
I would also say c because investor confidence is higher toward the end of a peak, thus spreads aren’t as steep. Probably totally wrong though, but we’ll see…
That’s also a good point deep. Because of the economic downturn people look for safe haven investments and buy treasuries. Demand for long term treasuries rises which causes an increase in price and a decrease in yield.
I think you need more information but I don’t see why you would automatically eliminate B… I’m trying to think about it in real terms… this is the interest rate term structure which you can think about as a spread on a certain benchmark (ie: spread to libor) benchmark decreases as fed interest rates contract spread increases as company risk goes up so maybe libor goes from 4% to 2% but maybe your agnostic dog grooming business goes from a 50bps spread to a 900bps spread because the bank has you by the balls if your trying to refinance thats 4.5% to 11% from peak down
The key point here is that at the peak of the business cycle rates are similar, meaning a flat curve. As fear of recession creeps in, interest rates are expected to go down, so you hurry up to buy the existing medium and long-term rates, pushing rates down. At the same time, other investors are selling short term to buy the LT rates, thus short term rates rise a little. So over all, you have a flat curve just beginning to invert. C.
Dreary Wrote: ------------------------------------------------------- > The key point here is that at the peak of the > business cycle rates are similar, meaning a flat > curve. As fear of recession creeps in, interest > rates are expected to go down, so you hurry up to > buy the existing medium and long-term rates, > pushing rates down. At the same time, other > investors are selling short term to buy the LT > rates, thus short term rates rise a little. So > over all, you have a flat curve just beginning to > invert. > > C. Why would rates be similar at peak of a cycle? You could argue that selling short term bonds and buying long term would raise short term yields and lower long term yields causing a “A dramatic downward-sloping, inverted yield curve.”
Was this your question or a real question? I really think you need to qualify exactly what it is referring to. Expected yields on bonds went down (because demand increased) but the interest rate term structure didnt change… and the new term structure was positive sloping as fear crept in and credit tightened. GE could sell paper to you at 5% in 2007 GE had to sell 10% preferred to Buffett in 2008
It’s a real question, but explanation is too long to copy. Check other people’s explanations here: http://www.analystforum.com/phorums/read.php?12,951141,951141#msg-951141
http://stockcharts.com/charts/YieldCurve.html Is the curve shape highly correlated to government intervention? Whenever there is a problem in economy, Fed will reduce the fed rate (quantitative easing policy), so the yield curve will be shift down and steepening. But when the enconomy is too hot, Fed will raise the rate, and make the yield curve shift up, flatten and even inverted. Don’t know what had happended in 70’s and 30’s. I read somewhere the rate raised up during those periods, the yield curve might be different from what we see today. Is such thing called REAL interest rate term structure? The current real interest rate is negative, I think. It will have problem to effective duration with rate near 0, especially KRD stuff. Is DCF still working in negative real discount rate?