Question

-What does it mean to have an inverted yield curve?
-How would a large decrease in interest rates impact expected return on equities?
-If investors are willing to accept low returns on risk-free assets for many years, what must happen to equity prices in order to make them attractive to investors?

Answer 1

1.Inverted Yield Curve

An inverted yield curve represents a situation in which long term debt instruments have lower yields than short term debt instruments of the same credit quality.

2.When the interest rate fallen significantly,investor will increase spending causing stock price to rise.Expected return on equity is sum of two parts-risk free rate and market risk premium.The extra return that investor therotically expect from equity is referred as risk premium.Accordingly when the interest rate decreases,expected return on equities also decrease.

3.If nothing changes,price of ewuity need to be higher in order to make them attractive to investors.