Question

The on the run yield curve is A. a plot of yield as a function of maturity for zero-coupon bonds. B. a plot of yield as a function of maturity for recently issued coupon bonds trading at or near par. C. a plot of yield as a function of maturity for corporate bonds with different risk ratings. D. a plot of liquidity premiums for different maturities.

Answer 1

The on the run yield curve is C. a plot of yield as a function of maturity for corporate bonds with different risk ratings.

The Treasury yield curve indicates that there are two important factors that complicate the relationship between maturity and yield.

1. The first is that the yield for on-the-run issues is distorted since these securities can be financed at cheaper rates, and therefore offer a lower yield than they would without this financing advantage.
2. The second is that on-the-run Treasury issues and off-the-run issues have different interest rate reinvestment risks.