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Lecture 3 Questions
1.
What do the different shapes of the yield curve mean? Please draw graphs.
Answer:
Rising Yield Curve (upward sloping): Expect future short rates to be higher than current
levels.
Falling Yield Curve (inverted or downward sloping): Expect decline in future short rates.
HumpBacked Yield Curve: Expect that future short rates will first rise and then fall.
Flat Yield Curve: Expect the future short rates to stay constant.
The graphs should be in your notes.
2.
a)
Calculate the forward rate for a oneperiod loan to be made 7 periods from now if
yield_7=6% and yield_6=4%?
Answer:
You were supposed to use the
f
y
y
n
n
n
n
n
=
+
+



(
)
(
)
1
1
1
1
1
formula in your lecture 3
notes.
If you plug in n=7, then you’ll get the forward rate=0.189.
b)
Calculate the forward rate for a fourperiod loan that matures at time 9 if yield_9=6%
and yield_5=4%?
Answer: You were supposed to use the
x
n
x
x
n
x
n
n
n
f
y
y
)
1
(
)
1
(
)
1
(
+
+
=
+


formula in
your lecture 3 notes.
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This note was uploaded on 11/18/2011 for the course FIN 353 taught by Professor Cobus during the Fall '08 term at S.F. State.
 Fall '08
 cobus
 Yield Curve

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