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Week 5 Q 2 - Assignment Example

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This refers to a line that shows the interest rates of bonds over a period of time with the same quality of credit but with different dates of maturity. In most cases the curve is used to compare certain durations of the bonds and these includes the 3 month, 2 year, 5 year and…
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Week 5 Q 2
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Download file to see previous pages A normal curve shows that over a period of time, long term bonds will yield higher returns than shorter duration bonds because of the reduction of risks over a greater period of time (Bhole, 2009).
An inverted yield curve shows that short term bonds will perform better than long term bonds and in most cases this is an indication of a coming recession. When the yield curve is flat it implies that there is a close relationship between the various returns over short and long term periods of time and usually shows that the economy of a given country is undergoing some sort of transition. It is therefore correct to say that an increase in the angle of the slope is directly proportional to an increase in the difference between the long and short term interest rates of the bonds. Below is an image showing a normal yield curve.
The yield curve for the economy is a normal yield curve shows that long term investment s will most likely yield a higher return than short term investments over a period of time. Currently, the interest rates are very low and this is a bad situation for possible investors. The bank of England decided to hold its interest rate at 0.5 % given that they are not expected to change positively until sometime next year. However, there is anticipation that the economy will perform well in future particularly due to an anticipated increase in industrial production over the next few years (Dawe, 2009). This shows that in the future the interest rates are likely to increase. However, presently, the interest rates are very low due to the various factors in the economy. One of these is unemployment which is at above 7% and has been recorded at a high of 7.3%. The inflation rate has also slowed down to a low of 1.7% and this is the lowest that it has ever been since the year 2009.
The interest rates are a major determinant of the direction in which our economy is headed. When the interest ...Download file to see next pagesRead More
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