In the Foreseeable Future,the Real Risk-Free Rate of Interest,r*,is Expected

question 23

Multiple Choice

In the foreseeable future,the real risk-free rate of interest,r*,is expected to remain at 3%,inflation is expected to steadily increase,and the maturity risk premium is expected to be 0.1(t − 1) %,where t is the number of years until the bond matures.Given this information,which of the following statements is CORRECT?

• A)The yield on 2-year Treasury securities must exceed the yield on 5-year Treasury securities.
• B)The yield on 5-year Treasury securities must exceed the yield on 10-year corporate bonds.
• C)The yield on 5-year corporate bonds must exceed the yield on 8-year Treasury bonds.
• D)The yield curve must be "humped."
• E)The yield curve must be upward sloping.

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Definitions:

Slope

In the context of a regression line, the slope represents the rate at which the dependent variable changes with respect to the independent variable, indicating the strength and direction of the linear relationship.

Intercept

The point at which a line or curve crosses an axis in a graph, often representing the starting or baseline value of the dependent variable when all other variables are held at zero.

Simple Linear Regression

A statistical method to model the relationship between a single independent variable and a dependent variable by fitting a linear equation to observed data.

SSE

Sum of Squares due to Error, a measure used in statistical analysis to quantify the variance within data points from the observed values.