Reading 20 EOC Question 12

CFA Level III
#1

Solution:

If the forecast is correct and the yield curve loses curvature, the rates at either end of the curve will rise or the intermediate yields will drop.

(Institute 232)

Institute, CFA. 2020 CFA Program Curriculum Level III Volume 4. CFA Institute, 08/2019. VitalBook file.

The citation provided is a guideline. Please check each citation for accuracy before use.

My question is isn’t losing curvature meaning short terms rates rise or long term rates decline? Why “rates at either end of the curve will rise”?

#2

No.

That’s flattening.

Losing curvature is when the average of the short-term and the long-term rates increases relative to the mid-term rate. This can happen by:

  • Short-term rate increases, mid-term and long-term rates remain unchanged
  • Long-term rate increases, short-term and mid-term rates remain unchanged
  • Short-term and long-term rates increase, mid-term rate remains unchanged
  • Short-term and long-term rates increase, mid-term rate decreases
  • Short-term and long-term rates increase, mid-term rate increases, but less than the average of the other two
  • And lots of other ways