Term structure

Question 1

Fact 1

Answer 1

interest rates on bonds of different maturities move together over time.

Question 2

Fact 2

Answer 2

when short-term interest rates are low, yield curves are more likely to have an upward slope.

Question 3

Fact 3

Answer 3

when short-term rates are high, yield curves are more likely to slope downward and be inverted.

Question 4

Fact 4

Answer 4

yield curves almost always slope upwards

Question 5

Theories to explain the facts

Answer 5

pure expectations hypothesis
liquidity premium theory
segmented markets hypothesis
preferred habitat theory

Question 6

Spot rate

Answer 6

The spot rate is the rate of return earned by a bond when it is bought and sold on the secondary market without collecting interest payments.