Explain why we obseve flat upward sloping and inverted yield

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Financial Economics

Question 1

(A) State whether the following statements are True, False or Uncertain. Provide a short justification for your answer.

(i) Bond A is a 5year bond with a 9% coupon rate and a YTM of 9%. Bond B is a 15year bond with a 8% coupon rate and a YTM of 10%. Both bonds have the same par value. Price of Bond A is higher than Price of Bond B.

(ii) The expectation hypothesis indicates a flat yield curve if anticipated future shortterm rates exceed current short term rates. (iii) For a discount bond, Coupon rate>YTM>Current Yield.

(B) Explain why we observe flat, upward sloping and inverted yield curves in the market. Give some examples from the web.

Reference no: EM13836049

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