13. Drawing a yield curve

Given the indicated maturities listed in the following table, assume the following yields for U.S. Treasury securities:

Maturity (Years)	1	5	10	20	30
Yield (%)	5.5	5.0	4.7	4.4	3.8

On the following graph, plot the yield curve implied by these interest rates. Place a blue point (circle symbol) at each maturity and interest rate in the table, and the yield curve will draw itself.

Tool tip: Mouse over the points in the graph to see their coordinates.

051015202530109876543210INTEREST RATE (Percent)MATURITY (Years)

The graphs yield curve is referred to asan inverted yield curve.

Based on the yield curve shown, which of the following statements is true?

If inflation in the future is expected to increase, the yield curve on U.S. Treasuries is likely to be downward sloping.

Interest rates on short-term maturities are higher than rates on medium- and long-term maturities.

Assume a scenario in which there is no maturity risk premium (MRP = 0%), the real risk-free rate is expected to remain constant, and the yield curve for U.S. Treasury securities is likely to be upward sloping for the next 10 years. Is inflation expected to increase, decrease, or stay the same over the next 10 years?

Increase

Stay the same

Decrease