Which of the following is consistent with a very flat yield curve for government bonds? a) An increasing risk of bond defaults b) Expectations of higher short-term interest rates in the future c) Expectations of increasing rates of economic growth d) A high demand for this country's bonds from overseas investors

Question

Kianna Miles

Business

23 August, 06:49

Which of the following is consistent with a very flat yield curve for government bonds? a) An increasing risk of bond defaults b) Expectations of higher short-term interest rates in the future c) Expectations of increasing rates of economic growth d) A high demand for this country's bonds from overseas investors

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Answers (1)

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Marquis · Answer 1

b) Expectations of higher short-term interest rates in the future

Explanation:

When the yield curve is normal (upward sloping) it is because investors expect longer-maturity bonds to have a higher yield than shorter-maturity bonds, since interest rates are expected to rise in the long term.

On the contrary, if the yield curve is flat, it is because short-maturity and long-maturity bonds are giving the same, or almost the same yield, indicating that investors expect short-term interest rates to rise so much, that they compensate the capital gains for short-maturity bonds in terms of interst.