The on the run yield curve is
A)a plot of yield as a function of maturity for zero-coupon bonds.
B)a plot of yield as a function of maturity for recently issued coupon bonds trading at or near par.
C)a plot of yield as a function of maturity for corporate bonds with different risk ratings.
D)a plot of liquidity premiums for different maturities.
E)A and B.

Question

The on the run yield curve is 
A)a plot of yield as a function of maturity for zero-coupon bonds.
B)a plot of yield as a function of maturity for recently issued coupon bonds trading at or near par.
C)a plot of yield as a function of maturity for corporate bonds with different risk ratings.
D)a plot of liquidity premiums for different maturities.
E)A and B.

Quizplus · Accepted Answer

The on the run yield curve refers to the yield curve plotted for recently issued coupon bonds that are trading at or near par. These bonds are referred to as "on the run" because they are the most recently issued and actively traded bonds in the market. The yield curve plotted for these bonds can be used as a benchmark for other bond yields. Choice A is incorrect because zero-coupon bonds pay no coupons, and so cannot be used to plot a yield curve based on coupon payments. Choice C is incorrect because the yield curve for corporate bonds would represent different levels of risk, whereas the on the run curve is specifically for Treasury bonds. Choice D is incorrect because liquidity premiums are not plotted on a yield curve. Choice E is incorrect because while zero-coupon bonds and recently issued coupon bonds are both types of bonds that could be plotted on a yield curve, the on the run yield curve refers specifically to the latter.

The on the Run Yield Curve Is