Market ECM

Question 1

Treasury yield curve

Answer 1

The yield curve is just a plot of the relation between the yield and the term of otherwise similar bonds.

The treasury yield curve plots treasury bond yields across their terms and is the most widely used yield curve as it sets a “risk-free” benchmark for other bonds

Question 2

What does inverted yield curve tell you?

Answer 2

An inverted yield curve means that yields on longer maturities are lower than shorter maturities of otherwise comparable bonds, like treasuries. Normally, yield curves are upward sloping as issuers must pay a premium to
entice investors to keep their capital locked up for a longer-term.

Indicator of recession

The inversion happens as investors anticipate market interest rates to decline down the road

Upward Sloping: Long-Term Government Bond Yields > Short-Term Government Bonds Yields

Inverted: Long-Term Government Bond Yields < Short-Term Government Bonds Yields

Steepening: The interest rate differential between Short-Term and Long-Term bonds is increasing

Flattening: The interest rate differential between Short-Term and Long-Term bonds is decreasing

Question 3

What is quantitative easing?

Answer 3

Quantitative easing (QE) is a form of monetary policy where the central bank will directly make purchases of longer-term securities from the open market to increase the money supply and total liquidity.

QE decreases interests rates, encourage more lending and money flow into equity since fx lower

Controversial since it floods market with money

Question 4

Relationship between bond prices and interest rates?

Answer 4

There is an inverse relationship between bond price and interest rates.

if market up then interest from debt less attractive —> prices of bonds drop