Suppose the yield curve today is upward sloping. a. What does this mean for expectations today...

Suppose the yield curve today is upward sloping.
a. What does this mean for expectations today of future rates if you believe the Expectations Theory? The Term Premium Theory? Why?
b. Suppose instead that we’re ending the growth stage of the business cycle. What does this suggest for how the slope will differ from today's slope. Why

c. You're pretty pleased with yourself for your work in a&b. However, you worked with book values of assets, debt and income. What do you think about this approach and why?

Expert Solution

1.a. An upward sloping yield curve represents that there is an expectation of higher yield in the longer time frame.Expectation theory emphasizes that investors want a higher yield to invest in the longer term bonds because as they have lesser of risk and higher of yield. so they will demand an additional premium on the bond yields to invest in the longer time frame bonds. That is also what is advocated by the premium theory which suggests that investors will demand a higher yield for investing in long term bonds.

b. If we are exhausted with the growth stage of the business cycle, there would be maturity and decline and at those times there would not be any expectation of outperformance of the company. hence, there would not be any expectation of premium in the overall yield of longer term bonds. Once the company has entered into the maturity and the growth stage, the yield curve would be more of flattened as there will be no expectation of growth in the long run.

3. The measurement of asset value on the basis of their value in books of accounts is a traditional approach which involves no updation and readjustment of the value of assets as it is recorded at the traditional value and it is not adjusted and synchronised with the updated market value. These approaches are highly used when it comes to different kind of valuations because the market rate of different assers are highly complex and conflicting in nature as different sources provides with market rates which are not uniform with each other.

jeff jeffy answered 1 year ago

When the yield curve is upward sloping, for profitability reasons bank managers;

When the yield curve is upward sloping, for profitability reasons bank managers;O fund and lend at the middle of the curveO none of the aboveO fund at the long end and lend at the short end of the curveO fund at the short end and lend at the long end of the curve

Suppose the demand curve for a product is vertical and the supply curve is upward sloping....

Suppose the demand curve for a product is vertical and the supply curve is upward sloping. If a unit tax is imposed in the market for this product, A. buyers bear the entire burden of the tax. B. buyers share the burden of the tax with government. C. the tax burden will be shared equally between buyers and sellers. D. sellers bear the entire burden of the tax. Explain how a downward-sloping demand curve results from consumers adjusting their consumption...

a) Assuming an upward sloping yield curve, explain why the swap rate curve is less than...

a) Assuming an upward sloping yield curve, explain why the swap rate curve is less than the Eurodollar curve for a given maturity. (b) State an alternative instrument to a Eurodollar future that can be used to hedge interest rate risk, and also state the two different settlement options for this instrument.

Why supply curve is upward sloping?

Suppose that in the market for widgets, the supply curve is the typical upward-sloping line, and...

Suppose that in the market for widgets, the supply curve is the typical upward-sloping line, and the demand curve is the typical downward-sloping line. A tax of $7.00 per unit is imposed on widgets and the price rises by $4.75. The equilibrium quantity before the tax imposition was 360,000 widgets and the equilibrium quantity after the tax is 347,500 widgets. The deadweight loss from the tax is A. less than $42,000 B. more than $42,000 but less than $43,550 C....

Suppose that in the market for widgets, the supply curve is the typical upward-sloping line, and the demand curve is the typical downward-sloping line.

Suppose that in the market for widgets, the supply curve is the typical upward-sloping line, and the demand curve is the typical downward-sloping line. A tax of $4.80 per unit is imposed on widgets and the price rises by $3.25. The equilibrium quantity before the tax imposition was 400,000 widgets and the equilibrium quantity after the tax is 364,000 widgets. The deadweight loss from the tax isSelect one:A. more than $74,150 but less than $76,600 B. more than $76,600 but less...

1. When the short-run marginal cost curve is upward-sloping, The average total cost curve is upward-sloping...

1. When the short-run marginal cost curve is upward-sloping, The average total cost curve is upward-sloping There are diseconomies of scale. The average total cost curve is above the marginal cost curve. Diminishing returns occurs with greater output. 2. Marginal revenue is the change in Group of answer choices Average revenue when output is changed. Average revenue when price is changed. Total revenue when output is changed. Total revenue when price is changed. 3.The shutdown point occurs where price equals...

Explain what the yield curve and the expectations hypothesis is. a) Suppose that the interest rate...

Explain what the yield curve and the expectations hypothesis is. a) Suppose that the interest rate on one-year bonds is currently 2 percent and is expected to be 3 percent in one year and 4 percent in two years. Using the expectations hypothesis, compute the yield curve for the next three years and show it graphically. b) Given the data in the accompanying table, would you say that this economy is heading for a boom or for a recession? Explain...

Why is the AD-curve downward sloping? 2. Why is the AS-curve upward sloping in the intermediate...

Why is the AD-curve downward sloping? 2. Why is the AS-curve upward sloping in the intermediate run? 3. True or false? Why? “Monetary policy does not affect real output in the Keynesian supply curve model.” 4.“In the classical AS-curve case, an increase in government spending will increase interest rates and real money balances.” Comment on this statement. 5. Comment on the following statement: “In the classical aggregate supply curve model, the economy is always at the full-employment level of...

1. What could cause a previously upward-sloping yield curve to flatten out and eventually become downward...

1. What could cause a previously upward-sloping yield curve to flatten out and eventually become downward sloping? 2. “An increase in government spending financed by borrowing from the public will increase the supply of money.” Comment on this statement. 3. Assume the government finances a spending increase by issuing new securities. Does this create a burden on future generations? Why or why not? Would it make a difference whether the spending increase was used to finance the building of a...

Question