Six months ago, the yield curve exhibited a slight downward slope. Over the last six months, the long-term yields declined, while short-term yields remained the same. Analysts stated that the shift was due to revised expectations of interest rates.

1. Given the shift in the yield curve, does it appear that firms increased or decreased their demand for long-term funds over the last six months?

2. Interpret what the shift in the yield curve suggests about the markets changing expectations of future interest rates.

3. Recently, an analyst argued that the underlying reason for the yield curve shift was that many of the large U.S. firms anticipate a recession. Explain why an anticipated recession could force the yield curve to shift as it has.

4. What could the specific shift in the yield curve signal about the ratings of existing corporate bonds? What types of corporations would be most likely to experience a change in their bond ratings as a result of the specific shift in the yield curve?