More frequently yield curves similar to that of march

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Unformatted text preview: ch is often called an inverted yield curve, has been the exception. More frequently, yield curves similar to that of March 15, 2002, have existed. These upward-sloping or normal yield curves indicate that short-term borrowing costs are below longterm borrowing costs. Sometimes, a flat yield curve, similar to that of September 29, 1989, exists. It reflects relatively similar borrowing costs for both short- and longer-term loans. PART 2 Important Financial Concepts FIGURE 6.3 Treasury Yield Curves Yield curves for U.S. Treasury securities: May 22, 1981; September 29, 1989; and March 15, 2002 Yield (annual rate of interest, %) 268 18 16 May 22, 1981 14 12 10 September 29, 1989 8 6 March 15, 2002 4 2 0 5 10 15 20 25 30 Time of Maturity (years) Sources: Data from Federal Reserve Bulletins (June 1981), p. A25 and (December 1989), p. A24; and U.S. Financial Data, Federal Reserve Bank of St. Louis (March 14, 2002), p. 7. The shape of the yield curve may affect the firm’s financing decisions. A financial manager who faces a downward-sloping yield curve is likely to rely more heavily on cheaper, long-term financing; when the yield curve is upward-sloping, the manager is more likely to use cheaper, short-term financing. Although a variety of other factors also influence the choice of loan maturity, the shape of the yield curve provides useful insights into future interest rate expectations. Theories of Term Structure Three theories are frequently cited to explain the general shape of the yield curve. They are the expectations theory, liquidity preference theory, and market segmentation theory. expectations theory The theory that the yield curve reflects investor expectations about future interest rates; an increasing inflation expectation results in an upward-sloping yield curve, and a decreasing inflation expectation results in a downward-sloping yield curve Expectations Theory One theory of the term structure of interest rates, the expectations theory, suggests that the yield curve reflects investor expecta...
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This document was uploaded on 01/19/2014.

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