9. Factors that impact the yield curve A U.S. Treasury yield curve is plotted in the following graph: There are three factors that can affect the shape of the Treasury yield curve (r*t, IP, and MRP) and five factors that can affect the shape of the corporate yield curve (T*, IP, MRP, DRP, and LPt). The yield curve reflects the aggregation of the impacts from these factors. INTEREST RATE %) 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. 5 4 Which of the following shapes can the U.S. Treasury yield curve take? Check all that apply. 3 Upward-sloping yield curve 2 Inverted yield curve 1 Downward-sloping yield curve 0 5 10 15 20 25 30 YEARS TO MATURITY Identify whether each of the following statements is true or false. Statements True False 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. O Based on an upward-sloping normal yield curve as shown, which of the following statements is correct? O There is a positive maturity risk premium. If inflation is expected to decrease in the future and the real rate is expected to remain steady, then the Treasury yield curve is downward sloping. Assume MRP = 0.) O If the pure expectations theory is correct, future short-term rates are expected to be higher than current short-term rates. Inflation must be expected to increase in the future. The yield curve for a AA-rated corporate bond is expected to be above the U.S. Treasury bond yield curve. O o Pure expectations theory must be correct