ECON 3410 MONEY AND BANKINGACTIVITY 2
ECON 3410 MONEY AND BANKING
ACTIVITY 2 - ORAL PRESENTATION
DUE: 18 NOV 2014
Monitoring Yield Curve Adjustments
As an analyst of a bond rating agency, you have been asked to interpret the implications of the recent shift in the yield curve. Six months ago, the yield curve exhibited a slight downward slope. Over the last six months, long-term yields declined while short-term yields remained the same. Analysts said that the shift was due to revised expectations of interest rates.
a. Given the shift in the yield curve, does it appear that firms increased or decreased their demand for long-term funds over the last six months?
The lower long-term yields may be attributed to a reduced demand for long-term funds. That is, firms may have reduced their issuance of long-term securities.
b. Interpret what the shift in the yield curve suggests about the market's changing expectations of future interest rates.
The yield curve six months ago implied the expectation of a slight decline in interest rates. The yield curve today implied the expectation of a larger decline in interest rates.
c. Recently, an analyst argued that the underlying reason for the yield curve shift is that many large US firms anticipate a recession. Explain why an anticipated recession could force the yield curve to shift as it has.
When the economic conditions are expected to decline(merosot), the demand for loanable funds by firms tends to decrease (because firms reduce their borrowing when they cut back on their expansion plans). Therefore, the long-term yields decline, and the yield curve developed a steeper downward slope. So this shift in the yield curve can indicate to the market that firms are reducing their amount of borrowing, in response to their assessment of future economic conditions.
d. What could the specific shift in the yield curve signal about the ratings of existing corporate bonds? What types of corporations would be most likely to experience a change in their bond ratings as a
ACTIVITY 2 - ORAL PRESENTATION
DUE: 18 NOV 2014
Monitoring Yield Curve Adjustments
As an analyst of a bond rating agency, you have been asked to interpret the implications of the recent shift in the yield curve. Six months ago, the yield curve exhibited a slight downward slope. Over the last six months, long-term yields declined while short-term yields remained the same. Analysts said that the shift was due to revised expectations of interest rates.
a. Given the shift in the yield curve, does it appear that firms increased or decreased their demand for long-term funds over the last six months?
The lower long-term yields may be attributed to a reduced demand for long-term funds. That is, firms may have reduced their issuance of long-term securities.
b. Interpret what the shift in the yield curve suggests about the market's changing expectations of future interest rates.
The yield curve six months ago implied the expectation of a slight decline in interest rates. The yield curve today implied the expectation of a larger decline in interest rates.
c. Recently, an analyst argued that the underlying reason for the yield curve shift is that many large US firms anticipate a recession. Explain why an anticipated recession could force the yield curve to shift as it has.
When the economic conditions are expected to decline(merosot), the demand for loanable funds by firms tends to decrease (because firms reduce their borrowing when they cut back on their expansion plans). Therefore, the long-term yields decline, and the yield curve developed a steeper downward slope. So this shift in the yield curve can indicate to the market that firms are reducing their amount of borrowing, in response to their assessment of future economic conditions.
d. What could the specific shift in the yield curve signal about the ratings of existing corporate bonds? What types of corporations would be most likely to experience a change in their bond ratings as a