The three economic factors that affect the shape of the yield curve are:
A) the real rate of interest, the expected rate of inflation, and marketability.
B) the real rate of interest, the expected rate of inflation, and interest rate risk.
C) the nominal rate of interest, the expected rate of inflation, and default risk.
D) the real rate of interest, the nominal rate of interest, and currency risk.

Question

Quizplus · Accepted Answer

The shape of the yield curve is primarily affected by three economic factors: the real rate of interest, the expected rate of inflation, and interest rate risk. The real rate of interest reflects the return investors demand for deferring consumption and investing their money over a specific time period. The expected rate of inflation reflects the anticipated change in the purchasing power of money over time. Finally, interest rate risk refers to the risk associated with changes in interest rates over time, which can affect the value of investments. These three factors can combine to produce different shapes of the yield curve, such as upward sloping, flat, or inverted curves.

The Three Economic Factors That Affect the Shape of the Yield