Question

A 30-yr Treasury bond with a coupon yield of 10% and a 5-yr Treasury bond with a coupon yield of 3% have different yields because:

• A. Inflation is expected to diminish the value of money
• B. The yield curve is inverted
• C. Lenders demand compensation for the longer time frame
• D. The yield curve is flat
• E. Both A & C

Answer 1

Answer

Both A & C

Reason:

>Treasury yield is the interest rate that the U.S govt. pays to borrow money for different length of time. Treasury yields don't just influence how much the government pays to borrow and how much investors earn by buying government bonds. They also influence the interest rates that individuals and businesses pay to borrow money to buy real estate, vehicles, and equipment. Treasury yields also tell us how investors feel about the economy.

>The yield curve is a graphical representation of yields on similar bonds across a variety of maturities. A normal yield curve slopes upward, reflecting the fact that short-term interest rates are usually lower than long-term rates. Yield curve flattens when the difference between yields on short-term bonds and yields on long-term bonds decreases.

>When the yield curve inverts, short-term interest rates become higher than long-term rates. This type of yield curve is the rarest of the three main curve types and is considered to be a predictor of economic recession.