Question

Graph 1 Graph 2 According to the liquidly premium theory, what does the shape of Graph 1 yield curve predict about the movement of short- term interest rates? B. According to the liquidly premium theory, what does the shape of Graph 2 yield curve predict about the movement of short- term interest rates? List the three famous facts about the yield curve.

Answer 1

Graph 1:

The first graph is downward sloping yield curve according to the liquidity premium theory it suggest that people thinks that in short term interest rates are going to fall.

Graph2:

This graph is upward sloping which states that people are expecting the interest rate to go up in a short run.

Three famous facts about yield curves:

• Interest rates on bonds of different maturities tend to move together over time. This means that yield curves from different dates do not generally intersect.
• When short-term rates are meager, yield curves tend to have steep upward slopes. When short-term rates are very high, yield curves tend to have flat or downward slopes
• Yield curves are almost always upward sloping.