Question

Long-term spot rates are usually higher than short-term spot rates.

Group of answer choices

True

False

Answer 1

We should note that time is an essential element in our analysis. A period is a portion of time that defined over its beginning and end point.

Spot rate: • That rate of effective annual growth that equates the present with the future value. • Thus, the spot rate is the cost of money over some time-horizon from a certain point in time. • This is identical with the yield to maturity, or internal rate of return, on a zero coupon bond. • Denote the yield of a bond at time t with n periods to maturity by yt (n).

The Yield Curve • Plots the effective annual yield against the number of periods an investment is held (from time t=0). • Empirical evidence suggests the effective annual yield is increasing in n, i.e. the number of periods remaining until maturity. )1()( )1()2( ... tt n t n t yy >>>> yy − , where refers to the yield at time t over n periods.

Hence answe is True.