slope

(noun)

The ratio of the vertical and horizontal distances between two points on a line; zero if the line is horizontal, undefined if it is vertical.

Examples of slope in the following topics:

  • Term Structure of Interest Rates

    • Yield curve could display a positive, negative, or flat slope and has two characteristics.
    • If investors expect that short-term interest rates will rise, then the yield curve has a positive slope.
    • If investors expect that short-term interest rates will drop, subsequently, the yield curve has a negative slope.
    • Consequently, the yield curve slopes upward because the investors add the term premium to long maturity bonds.
    • If investors expect the short-term interest rates will increase, then the yield curve has a positive slope.

  • Defining the Security Market Line

    • The slope of the SML is equal to the market risk premium and reflects the risk return trade off at a given time.
    • In this case it looks rearranged, like y = b + mx, but the real question is what do the slope and y-intercept actually represent?
    • The y-intercept of this line is the risk-free rate (the ROI of an investment with beta value of 0), and the slope is the premium that the market charges for risk.

  • Chapter Questions

    • If you saw a yield curve with a negative slope, which economic phenomenon would you predict to occur in a year?

  • The Term Structure

    • Because of the term premium, long-term bond yields tend to be higher than short-term yields, and the yield curve slopes upward.
    • The curve has a typical upward sloping shape.

  • The SML Approach

    • The y-intercept of the SML is equal to the risk-free interest rate, while the slope is equal to the market risk premium (the market's rate of return minus the risk-free rate).
    • The slope also represents the risk-return tradeoff at a given time.

  • Answers to Chapter 9 Questions

    • Expectations theory is for investors to invest in longer-term securities; they expect the interest rate to be greater, causing a positively sloping yield curve.
    • When a yield curve has a negative slope, the investors are pessimistic about the future, and the economy usually enters a recession a year later.

  • Using the Yield Curve to Estimate Interest Rates in the Future

    • Through assessing the slope of a yield curve on debt instruments such as governmental treasury bonds, investors can estimate the overall health of the economy in the future (i.e. inflation, interest rates, recessions, growth).
    • Inverted yield curves are typically predictors of recession, while positively sloped yield curves indicate inflationary growth.

  • The Yield Curve

    • ., the slope of the yield curve is positive).
    • This positive slope reflects investor expectations for the economy to grow in the future and, importantly, for this growth to be associated with a greater expectation that inflation will rise in the future rather than fall.
    • Because of the term premium, long-term bond yields tend to be higher than short-term yields, and the yield curve slopes upward.

  • The Law of Comparative Advantage

    • Opportunity cost reflects the slopes of the PPCs.
    • Slope for the United States equals 0.5, which means the U.S. must give up the production of one car to produce 0.5 tomatoes.
    • On the other hand, Mexico has a slope of 2.

  • Default Risk and Bond Price

    • Yield curve usually slopes upward and means the long-term U.S. government securities pay a higher interest rate than the short-term ones.