Key Concepts
1. Use a current Wall Street Journal or other newspaper to show how yields vary among securities. The
chapter helps to explain the disparity in yields.
2. Provide logic behind how default risk, liquidity, tax status, and maturity can affect yields.
3. Offer various theories for the term structure of interest rates, and then combine these theories to
provide an integrated explanation.
POINT/COUNTER-POINT:
Should a Yield Curve Influence a Borrower’s Preferred Maturity of a Loan?
POINT: Yes. If there is an upward-sloping yield curve, then a borrower should pursue a short-term loan to
capitalize on the lower annualized rate charged for a short-term period. The borrower can obtain a series
of short-term loans rather than one loan to match the desired maturity.
COUNTER-POINT: No. The borrower will face uncertainty regarding the interest rate charged on
subsequent loans that are needed. An upward-sloping yield curve would suggest that interest rates will
rise in the future, which will cause the cost of borrowing to increase. Overall, the cost of borrowing may
be higher when using a series of loans than when matching the debt maturity to the time period in which
funds are needed.
WHO IS CORRECT? Use the Internet to learn more about this issue and then formulate your own
opinion.
ANSWER: Either side could be correct. If you believe that the yield curve provides a reasonable forecast
of future interest rates, then the counter-point is a more valid argument.