15. Factors that impact the yield curve Aa Aa E There are three factors that can affect the shape of the government bond yield curve (r*t, IPt, and MRP) and five factors that can affect the shape of the corporate bond yield curve (r*t, IPT, MRP, DRPt, and LPt). The yield curve reflects the aggregation of the impacts from these factors. Suppose the real risk-free rate and inflation rate are expected to remain at their current levels throughout the foreseeable future. Consider all factors that affect the yield curve. Then identify which of the following shapes the government bond yield curve can take. Check all that apply. O Downward-sloping yield curve Inverted yield curve Upward-sloping yield curve Identify whether each of the following statements is true or false. True False Statements If inflation is expected to decrease in the future and the real rate is expected to remain steady, then the government bond yield curve is downward sloping. (Assume MRP = 0.) The default risk on Canadian Tire's short-term debt will be higher than the default risk on its long-term debt. The yield curve for an AA-rated corporate bond is expected to be above the government bond yield curve. Yield curves of highly liquid assets will be lower than yield curves of relatively less liquid assets. A government bond yield curve is plotted in the following graph: INTEREST RATE (%) 0 5 10 15 20 25 30 YEARS TO MATURITY Based on an upward-sloping normal yield curve as shown, which of the following statements is correct? O O O Inflation must be expected to increase in the future. Pure expectations theory must be correct. If the pure expectations theory is correct, future short-term rates are expected to be higher than current short-term rates