The table, below, shows market prices for four zero coupon bonds with four different terms: one, two, three and four years. The bonds all have a face value of $1,000. The yield curve derived from the bond prices in the table above is best described as: $$\begin{array} { | c | c | }
\hline \text { Term } ( \text { years) } & \text { Price } ( \$ ) \
\hline 1 & 970.8738 \
\hline 2 & 933.5107 \
\hline 3 & 888.9964 \
\hline 4 & 822.7025 \
\hline
\end{array}$$

Question

The table, below, shows market prices for four zero coupon bonds with four different terms: one, two, three and four years. The bonds all have a face value of $1,000. The yield curve derived from the bond prices in the table above is best described as: $$\begin{array} { | c | c | } 
\hline \text { Term } ( \text { years) } & \text { Price } ( \$ ) \
\hline 1 & 970.8738 \
\hline 2 & 933.5107 \
\hline 3 & 888.9964 \
\hline 4 & 822.7025 \
\hline
\end{array}$$

Quizplus · Accepted Answer

The yield curve is upward sloping because the prices of the bonds decrease as the term increases, which means that the yields increase as the term increases. The spread between the short and long term yields is 2% because the yield on the one-year bond is 2% lower than the yield on the four-year bond.

The Table, Below, Shows Market Prices for Four Zero Coupon