CFA Practice Question

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CFA Practice Question

If the yield on a 3-year Treasury increases by 5 basis points, then the yields on all other Treasuries also increase by 5 basis points.

A. This situation never happens.
B. This situation seldom happens.
C. This situation happens often.
Correct Answer: B

This is an example of parallel shifts. A parallel shift in the yield curve occurs when the interest rates among bonds (or T-Bills) with different maturity dates change at the same rate. In the real world, parallel shifts are very uncommon. Shifts in the yield curve generally result in a yield curve that either steepens or flattens, indicating that interest rates did not change by the same amount.

User Contributed Comments 1

User Comment
ryanpetty Yield curve shifts are rarely parallel.

An investor that can correctly forecast a parallel shift in the yield curve can profit by buying and selling the securities most affected by the shift.

In the real world, however, the yield curve does not move this way. The curve tends to steepen, or yield an increase in the long end of the curve compared to shorter issues. The curve can also flatten, with yield on the long end decreasing at a faster rate than at the short end of the curve.
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