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True or False Investors often evaluate their investment options by comparing them to the risk free...

True or False

Investors often evaluate their investment options by comparing them to the risk free rate of return offered by US Treasury securities (this rate is considered to be the risk free rate of return due to the low probability that the US Government would not meet its debt obligations). The interest rates on various maturities of these securities are plotted on a graph - called a yield curve. The normal shape of the US Treasury securities yield curve is upward (positive) sloping.

True or False - one explanation for that upward sloping yield curve would be that investors expect inflation at or above historical levels in the future

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Answer #1

1: True

Investors need to know how much premium they are getting for taking additional risk. For this they compare it to risk free rate. The yield curve shows the interest rates atvarious maturities. Upward sloping curve means that the rates are higher with higher maturities.

2: True

Upward sloping yield curve means that the yields are higher with higher maturities. This is partlybecause the investors expect higher inflation in future and so they will be taking higher risks. This hence requires higher yields with higher maturities.

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