Question

Create a graphic or presentation that explains why bonds of different maturities have different yields in terms of the expectations and liquidity preference hypotheses. Demonstrate the implications of each hypothesis when the yield curve is (1) upward-sloping and (2) downward-sloping.

Answer

The Normal Yield Curve indicates investors expect higher rates of returns for investment lasting for longer periods of time. Investors believe there will be inflation and therefore expect higher yields for their extended investments.

The Inverted Yield Curve indicates investors expect lower rates of returns for investments lasting for longer periods of time. They operate under the assumption that interest rates will fall and therefore bond yields in the future will be less.

The Flat Yield Curve indicates investors believe there will be little to no change in interest rates within the date future. Therefore, the bond yield rates remain parallel to US treasury bonds with added liquidity risk (risk premium)

------------------------------------------------------------------

Overall, the price of the bond has inverse relationship with the bonds expected yield. For example, if bond yields are expected to rise, the bond price will be discounted

http://www.investinganswers.com/financial-dictionary/bonds/yield-curve-810

Based on the above information, please comment