5. Factors that impact the yield curve There are three factors that can affect the shape of the Treasury yield curve (r,IPs, and MRP ) and five factors that can affect the shape of the corporate vield curve (ri,IP1,MRPt,D2Pi and Ui). 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 that the US Treasury yield curve can take. Check all that apply. Inverted yield curve Downward-sloping yield curve Upward-sloping yield curve Identify whether each of the following statements is true or faise. Statements True False If inflation is expected to decrease in the future and the real rate is expected to remain steady, then the Treasury yid curve is downward sloping. (Assume MRP =0.) All else equal, the yleid on new bonds issued by a leveraged firm will be less than the yeld on the new bonds issued by an unleveraged firm. The vilid curve for an AA-rated corporate bend is expected to be above the us Treasury bond yieid curve. Yield curves of highly liquid assets wil be lower than yield curves of relotively illiquid assets. A US Treasury vield curve is plotted in the following graph: Based on an upward-sloping normal vield curve as shown, which of the following statements is correct? Inflation must be expected to increase in the future. Pure expectations theory must be correct. There is a positive maturity risk premium