Interview Question - yield and strip rates
This question came up in my interview:
Why would yields or strip rates would increase and then decrease as maturity increased?
This really hit me off balance so I'm looking for what my actual answer should have been?
I'm not sure if I correctly understand your question. The answer will be depending on the shape of the curve (i.e. inverted). There are a couple of theories about the shape, and particularly about this specific behaviour (e.g. market segmentation and preferred habitat).
Perhaps helps you as an introduction (check their references for more detail): http://en.wikipedia.org/wiki/Yield_curve
I hope your interview went well nonethless...
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