An upward sloping curve would be associated with bond risk premiums that are positively, not negatively, related to the consumption hedging benefits of government bonds.
What do we mean by this sentence?
Please briefly explain why you feel this question should be reported.
Please briefly explain why you feel this answer should be reported.
Please briefly explain why you feel this user should be reported.
https://forum.sseiqforum.com/question/cfa-mock-question/
please go through the explanation provided by Tushar for that answer
Thanks, Dhwani, however, the explanation given in the link is a little unclear to me. Please could you explain elaborately?
Yes sure I’ll attach an audio explanation by the end of today please wait.
Hey can you please help me with one thing and upload the entire paragraph where this line is written because in core they have taken data from the Us and Uk economy and came to this conclusion.
I do suggest you to go through that exhibit because it’s only a one page explanation and it is comprehensive.
Hi Juhi. Let me explain.
When you anticipate bad times ahead. For example: In this question, the Australian economy was in recession and due to the recession the central bank had been cutting interest rates and printing money. But due to so much liquidity, it is expected that the central bank may reverse their stance and start with increasing interest rates on account of inflation concerns in the future. Now, you know that too much inflation is also bad for the economy. It hampers growth and when this happens, the investors are worried about the future right? In such times, bonds do relatively better than Equities. NOw, you tell- Which would provide a better hedge to you in such times? Bonds or Equities? Obviously bonds right? So the risk premium demanded by investors for investing in bonds would be comparatively lower than the risk premium demanded for investing in Equities. Hence, this means that bond risk premiums and the consumption hedging benefits i.e the benefit of investing in bonds when you anticipate gloomy times ahead are positively correlated and not negatively correlated i.e If bonds are acting as a better hedge as compared to Equities, then the risk premium should also be less and vica versa. Hence, positive correlation between both of them.