Consider the following four debt securities, which are identical in every characteristic except as noted:
W: A corporate bond rated AAA
X: A corporate bond rate BBB
Y: A corporate bond rated AAA with a shorter time to maturity than bonds W and X
Z: A corporate bond rated AAA with the same time to maturity as bond Y that trades in a more liquid market than bonds W, X, or Y.
List the bonds in the most likely order of the interest rates (yields to maturity) of the bonds from highest to lowest. Explain your work.
2. Explain how an economist could use the slope of the yield curve to analyze the probability that a recession will occur and why the spread may matter.
2 answers