Impact of Economic Growth on Bond Pricing

Hard Fixed Income Valuation Term Structure Of Interest Rates

In a theoretical economy, the term structure of interest rates exhibits an upward slope, indicating that longer-term bonds yield higher interest rates than shorter-term bonds. Investor expectations regarding future inflation and economic growth influence this structure. An investor is assessing a 10-year Treasury bond versus a 2-year Treasury bond. The investor believes that economic growth will prompt increasing interest rates over the next several years. Given these conditions, identify the most appropriate conclusion regarding the pricing of these bonds.

The 10-year Treasury bond will likely be priced higher than the 2-year Treasury bond due to higher expected future rates.

The 2-year Treasury bond will likely be priced higher than the 10-year Treasury bond because investors prefer shorter maturities.

Both bonds will be priced equally, as the term structure suggests parallel shifts in interest rates.

Hint

Submitted3.5K

Correct2.2K

% Correct63%