CFA Practice Question
A disproportionate bidding up of short-term U.S. Treasury issues, combined with an increase in the supply of long-term U.S. Treasury issues, holding everything else equal, will likely have which of the following consequences.
A. An inverted yield curve will steepen.
B. An upward sloping yield curve will flatten.
C. An inverted yield curve will flatten or even become upward sloping.
Explanation: A disproportionate bidding up of short-term U.S. Treasury issues will cause the yields on these instruments to fall. This will cause a flat yield curve to become upward sloping, an inverted yield curve to flatten (or, in extreme cases, to become upward sloping), and an upward sloping ("normal") yield curve to steepen.
An increase in the supply of long-term U.S. Treasury issues will have a similar effect. An increase in the supply of U.S. Treasury Securities will cause the yields on these securities to rise versus short-term and intermediate-term U.S. Treasury issues. Holding everything else equal, this will cause an upward sloping yield curve to steepen, a flat yield curve to become upward sloping, and an inverted yield curve to flatten, or even become upward sloping.
User Contributed Comments 7
| User | Comment |
|---|---|
| chantal | can someone explain pls ? |
| rubin1 | very difficult explaination |
| cwest020 | Short end of the curve is facing increasing prices or decreasing yields... Long end of the curve is facing increasing supply which will increase yields. The short end decreases while the long end increase. If the curve is inverted (downward sloping) the curve will move towards flat/upward sloping. |
| czar | yield works the opposite of price... when demand increases for short term, price will rise, yield will fall when supply inc for long term...price will fall, yield will increase...the yeild curve goes from low to high, i.e. it slopes upward |
| moneyguy | you have to be kidding me..... |
| Ifi2703 | Easiest thing - draw a diagram of a yield curve and then if price goes up, we know yield comes down. So then you can easily work out the effects that might have on a normal, flat or inverted curve and pick the right answer. Makes it a lot easier! |
| enetis | moneyguy... I totally agree w/ you!! you can throw out all your rates or credit desk experience... you just have to give them what they want. |