5. For each of the following descriptions of a yield curve, what is the market predicting about...
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5. For each of the following descriptions of a yield curve, what is the market predicting about movements in future short-term interest rates, assuming that the liquidity premium theory of the term structure is correct? Explain. a. The yield curve is perfectly flat. b. The yield curve is moderately upward sloping. c. The yield curve is inverted. d. The yield curve is steeply upward sloping. 6. Describe what risk premium is as defined in class and the text. 7. What three characteristics of a bond are collectively embedded in the risk structure of interest rates? How does a change in each affect the spread or risk premium?
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