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In relation to the yield curve, which of the following statements is correct?
A Expectations theory suggests that deferred consumption requires increased
compensation as maturity increases
B An inverted yield curve can be caused by government action to increase its
long?term borrowing
C A kink (discontinuity) in the normal yield curve can be due to differing yields in
different market segments
D Basis risk can cause the corporate yield curve to rise more steeply than than govt. yield curve
sir in this i do not understand why answer cannot be B
because if we want to increase long term borrowing, we will reduce the interest on long term borrowing and hence inverted yield curve?An inverted yield curve can arise if government policy is to keep short-term interest rates high in order to bring down inflation.
This means that an inverted yield curve is more likely to be caused by government action to control short-term interest rates rather than by increasing its long-term borrowing.
Sir if the government wants to increase it’s long term borrowing…will there be a upward yield curve?
An inverted yield curve occurs when ST int rates exceed LT rates. Under normal circumstances, the yield curve is not inverted since debt with longer maturities typically carry higher rates. It is an uncommon event.
It is not possible to determine the specific impact of the government’s long-term borrowing on the shape of the yield curve.
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