- CFA Exams
- CFA Level I Exam
- Study Session 17. Portfolio Management (2)
- Reading 46. Economics and Investment Markets
- Subject 3. The Yield Curve and the Business Cycle
CFA Practice Question
Which statement is an interpretation of an upward-sloping yield curve?
B. Bond market participants expect short-term interest rates to decline.
C. Short-dated bonds are less positively (or more negatively) correlated with bad times than are long-dated bonds.
A. Government bonds tend to pay off in bad economic times.
B. Bond market participants expect short-term interest rates to decline.
C. Short-dated bonds are less positively (or more negatively) correlated with bad times than are long-dated bonds.
Correct Answer: C
Short-dated bonds have been more reliable hedges against bad economic times than long-dated bonds. This means the bond risk premium should be higher for long-dated government bonds than for their short-dated equivalents. The yield curve should be upward-sloping to reflect this result.
Statement B can explain the downward sloping UK gilt curve in the summer of 2007.
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