Assume the Following: the Real Risk-Free Rate,r*,is Expected to Remain

question 18

Multiple Choice

Assume the following: The real risk-free rate,r*,is expected to remain constant at 3%.Inflation is expected to be 3% next year and then to be constant at 2% a year thereafter.The maturity risk premium is zero.Given this information,which of the following statements is CORRECT?

• A) The yield curve for U.S.Treasury securities will be upward sloping.
• B) A 5-year corporate bond must have a lower yield than a 5-year Treasury security.
• C) A 5-year corporate bond must have a lower yield than a 7-year Treasury security.
• D) The real risk-free rate cannot be constant if inflation is not expected to remain constant.
• E) This problem assumed a zero maturity risk premium,but that is probably not valid in the real world.

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Definitions:

Sum of Its Parts

A principle indicating that the whole entity or system's value or functionality is equal to the combination of its individual components or elements.

Teamwork

The collaborative effort of a group to achieve a common goal or complete a task in the most effective and efficient way.

Short-Run Equilibrium

A state where supply and demand are balanced at a particular price level within a short time frame, especially in markets or within firms.

Long-Run Equilibrium

A state where there is no tendency for economic variables, such as prices, outputs, or employment, to change, because all agents in the economy have fully adjusted to any changes.