15. Factors that impact the yield curve There are three factors that can affect the shape of the Treasury yield curve ( IP and MRP) and five factors that can affect the shape of the corporate yield curve ( IP MRP, DRP and LP). 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 identity which of the following shapes that the U.S. Treasury Yield curve can take. Check all that any Inverted yield curve Downward sloping yield curve Upward sloping vield curve Statements True False The yield curve for a AA-rated corporate bond is expected to be above the U.S. Treasury bond yield curve. o o Yield curves of highly liquid assets will be lower than yield curves of relatively illiquid assets. All else equal, the yield on new bonds issued by a leveraged firm will be less than the yield on the new bonds issued by an unleveraged firm If inflation is expected to decrease in the future and the real rate is expected to remain steady, then the Treasury yield curveis downward sloping (Assume MRP -0.) A U.S. Treasury yield curve is plotted in the following graph: INTEREST RATE (%) lom 5 10 15 20 25 Based on an upward-sloping normal yield curve as shown, which of the following statements is correct? Inflation must be expected to increase in the future. There is a positive maturity risk premium. Pure expectations theory must be correct If the pure expectations theory is correct future short-termatera